Uber's success is due to innovations that have been, let's say, met with dismay in some quarters. There is the way it so masterfully harnessed the on-demand worker model, which spawned dozens of copy-cat offerings in other industries -- and invigorated debate at state and federal levels about worker classification and rights.
Its ability muscle aside just about any regulatory or industry push back, while not an innovation, has led to much colorful commentary.
The most hated innovation of them all, however -- to Uber's users at least -- has been its adoption and application of a price model in which fares fluctuate if there is a peak demand for rides and limited supply (aka surge pricing).
Now, an entrenched American institution, Disney Parks, is following suit.
This is going to be interesting.
Seasonal Pricing Starts Sunday
In a blog post Disney announced that it is moving to "seasonal" pricing (it doesn’t use the word ‘surge’ and in fact objects to its use) for one-day tickets, effective on Sunday, February 28.
It explained how it would work in the post:
Each month is divided into value, regular and peak days with an 8-11 month calendar available for viewing online. Here’s an example, if guests plan their visit for September, they’ll have a variety of options, including many days in the value period, which will give them the opportunity to pay less for a 1-Day ticket. If they plan to visit during a peak period, like the winter holidays, they will pay more. Purchasing a 1-Day ticket in a non-peak period, or choosing multi-day tickets and annual passes, will provide additional flexibility and value.
The move is Disney’s efforts to do something after a ticket for the Magic Kingdom hit $100 last year, generating much hang-wringing that the park was now out of reach of the middle class.
The on-demand pricing (another word for this model) would increase prices by 20% across Disney’s theme parks on peak days, Bloomberg calculates, such as holiday periods and July weekends. A visitor can expect to buy a one-day ticket for $119 on those days.
A Disney spokesperson gave me additional details about how this will work. There will be an 8-11 month rolling calendar available online, where customers can see what the price will be for a one-day ticket on a specific day. So, for example, if a person knows in March that he will want to buy a one-day ticket on May 23 for Disney Epcot, he can go online to see if it will be priced $97 or $102 or $114 (the range that Disney has set for Disney studios, Epcot and the animal kingdom, according to the pricing information Disney provided).
For the Magic Kingdom the value price will be $105, regular will be $110 and peak, $124.
Disneyland California’s prices are $95, $105 and $119.
That, at least, is the schedule for 2016. The Disney spokesperson said pricing starting January 2017 will roll out in the next month or so.
Some fundamentals I’d like to point out now:
- Yes, a vacation at Disney is an expected experience for every kid, something that every parent wants to give their child, preferably more than once. But it’s a luxury not a necessity.
- Yes, it stinks that the seasonal prices only take $5 off during value days but adds $20 during peak days.
- But at the end of the day, Disney is and should be free to charge whatever it wants -- this is not a life-saving drug with no other viable products on the market.
- Ditto Uber for the aforementioned reasons.
- For the sake of middle America’s financial well-being I hope if/as surge pricing (in all its forms and however you want to call it) spreads it will be more along the lines of Disney’s transparent model.
- FYI to companies watching all this with interest: consumers hate surge pricing, or rather they hate the version of it that Uber has popularized.
What Is In the Black Box?
We should ask ourselves why consumers hate it. Or rather, first let’s look at why economists love it so much, because for the most part, they do.
On-demand pricing is the epitome of free-market economic theory, when, that is, it is not applied to emergency situations such as after a natural disaster. Then it becomes price gouging. But if there are other options available to consumers, it is your basic Adam Smith, Econ 101 in action. Demand for a service has exceeded supply, ergo the price must rise.
And even the most penny-pinching, deal-seeking consumer can understand that, even if she doesn't like it.
Uber added a couple of twists, one of which is that the price increases happens very quickly, responding almost in real time to changing circumstances.
In this post at Psychology Today, Utpal Dholakia, a professor at Rice University, does a great take down of why so many consumers have a visceral dislike of Uber’s style of this form of pricing -- despite the fact that the company warns consumers that surge pricing has gone into effect, even making them type in an affirmation just to be sure they know what is happening.
Briefly, Dholakia writes: because it doesn’t seem “right” that a trip one way costs $8 and two hours later can be three times as much; because it introduces uncertainty in what should be a routine transaction; because it kicks in at the worst possible time (rainy night, New Year’s Eve) and finally, because the surge price setting process is not remotely transparent.
Yes, that’s right. Prof. Dholakia has gone there.
He writes:
For riders, the bad news is that the algorithm is a closely guarded secret and much too complicated to explain to users anyway. This creates the sense that the surge multiplier calculation is a “black box”. Just as bad, in keeping with economic theory on which surge pricing is based, there is no upper limit on how high prices can go. Figuring out the surge multiplier is like bidding in an auction: as long as there is an imbalance between supply and demand, the multiplier will keep rising, resulting in the possibility of some Uber riders paying obscene prices.
He also referenced a study done by a colleague, Nicholas Diakopoulos, an assistant professor in the College of Journalism at the University of Maryland, published in the Washington Post.
Diakopoulos found that “rather than motivating a fresh supply of drivers, surge pricing instead re-distributes drivers already on the road.”
Another, separate study [PDF] by Boston University researchers made similar observations about the black-box nature of Uber’s pricing algorithm.
Price Setting, Free-Markets Style
Here’s the thing about Econ 101, Adam Smith and the worship of all things free market. The theories assume that the price is arrived at purely by supply and demand and that no outside force or undue influence, has interfered with that price.
Surge pricing, which as a reminder Uber did not invent but only popularized, actually has some very useful applications. It is used in the conservation of scarce resources, like water for instance. In a growing number of cases, it is being used to set tolls on highways when they are congested. Colorado’s new 1-70 toll road, for instance, uses it with drivers paying between $3 to $30 depending on traffic conditions to use the express lane. And yes, it is used by companies like Disney to limit its crowds, or at least make sure that the crowds trying to jam into its park on a certain, popular day pay accordingly -- $20 more, in Disney's case for 2016 at least, accordingly.
But Uber’s methods have had a way of being adopted elsewhere in the economy, with the end result not always a pretty one. Here’s hoping Disney popularizes the more transparent surge/on demand/seasonal price setting model.
