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Uber’s Most Important Innovation Isn’t A Car Service: It’s the Pricing Algorithm | MIT Technology Review

Uber’s most important innovation is the way it prices its services. But that innovation has not been unreservedly welcomed by customers. They’re wrong.

In the four years since the car service Uber launched, it has been beset by criticism from myriad groups, including city officials annoyed by its sometimes cavalier attitude toward regulation and taxi companies annoyed by increased competition. Some of the harshest criticism, though, has come from an unlikely place: Uber’s own customers. Thanks to its reliance on what it calls “surge pricing”— meaning that during times of high demand, Uber raises its prices, often sharply—the company has been accused of profiteering and exploiting its customers. When Uber jacked up prices during a snowstorm in New York last December, for instance, there was an eruption of complaints, the general mood being summed up by a tweet calling Uber “price-gouging assholes.”

What’s striking about the Uber backlash is that the company is hardly the first to use dynamic pricing. There have always been crude forms of price differentiation—or, as it is known in economics, price discrimination. If you go to a movie matinee, you pay less than if you go at night, and if you’re willing to wait to buy a new dress (and run the risk that it might sell out), you can often get it at a marked-down price. But dynamic pricing in a more rigorous sense was pioneered in the 1980s by Robert Crandall, CEO of American Airlines, as a way to fight off competition from discount airlines like People Express. American began by slashing prices for tickets bought well in advance, while keeping prices for tickets bought closer to takeoff (when ticket inventory was lower, and demand was less price-sensitive) as high as possible. In the decades since, this kind of yield management has become integral to the business models of airlines, hotels, and rental-car companies, and greater computing power and more sophisticated data analysis has turned pricing in these industries into an incredibly complex process. (Dynamic pricing has also allowed sites like Priceline and Hotwire to flourish, since when hotels are stuck with extra rooms, they’re often willing to drop prices rather than let a room sit empty.) More recently, as technology has made it easier to segment the market and change prices on the fly, dynamic pricing has become common in other industries, too. Many professional sports teams now use it to set ticket prices—games against high-profile teams cost more than games against cellar dwellers—while concert ticket prices wax and wane with demand.

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Uber’s Most Important Innovation Isn’t A Car Service: It’s the Pricing Algorithm.

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