By Matt Stoller, who writes for Salon and has contributed to Politico, Alternet, Salon, The Nation and Reuters. You can reach him at stoller (at) gmail.com or follow him on Twitter at @matthewstoller. Originally published at Observations on Credit and Surveillance
We are not setting the price. The market is setting the price. We have algorithms to determine what that market is.
That’s a remarkable quote from the CEO of Uber.
Uber of course is a cab service that lets you order a cab from your smartphone via an App. It’s really neat, you get to watch the cab approach on a map, the payment is automatically applied so you don’t have to even deal with the transaction itself. The company is now taking its approach to logistics, and moving to ‘disrupt’ the delivery industry as well, competing with courier services, UPS, Fedex, and the Post Office. It’ll be interesting to see what happens there.
But it’s important to recognize just what Uber actually represents. Uber started out named UberCab, and ‘uber’ is a German word which means ‘over’ or ‘better than’ or ‘the ultimate’. So UberCab meant, the ultimate cab. At the core of Uber’s strategy has been lobbying and advocacy to make sure that it can get into regulated cab markets. And this is so Uber can ‘disrupt’ and destroy them.
A healthy cab ecosystem relies on expectations of a market (with price-fixing by political authorities, mostly taxi commissions). There have to be people trying to hail cabs, and cabs driving around to find customers. As more people use Uber, there will be fewer people trying to hail cabs, and fewer cabs picking up people, which will lead to reduced expectations cabs will be available, and so on and so forth. Gradually the ‘open cab market’ will be displaced by a closed Uber service. I’ve already noticed it’s harder to hail cabs where I live, capacity is often taken up by Uber riders.
Open cab markets aren’t gone, but they will die eventually. They will go the way of open cattle, pig, and chicken markets, which mostly don’t exist anymore due to concentration in the meat market (read The Meat Racket for a great understanding of what happens when markets are captured by big business).
Uber’s ascendance hasn’t come without controversy. A lot of people are focused on the company’s use of surge pricing, which is when the company charges more money to customers because there is ostensibly high demand, such as during snowstorms or during New Year’s eve. It’s a controversial practice, to say the least.
The CEO of Uber, Travis Kalanick, has responded by basically saying ‘deal with it, it’s market-pricing.’ His argument is that higher pricing brings more drivers into the market, matching supply with demand. It is the optimal way to get as many people home as possible.
His argument, though, is phrased somewhat oddly. Kalanick notes “we are not setting the price, the market is setting the price.” But then, non-ironically, immediately adds “we have algorithms to determine what that market is.” In other words, the prices his company sets in the markets that his company controls are somehow, well, natural. So complaining about this is like complaining about the rain.
This is, of course, absurd. Uber is aiming for an algorithmic monopoly, control of a market through contract pricing. That the contract pricing is done with a complicated algorithm doesn’t make it a market, it just makes it complicated. Standard Oil would love this rationale.
There are three big issues with Uber’s model.
One, Uber controls all of the information in this so-called ‘market’. One of the premises of a market is relatively balanced information on the part of both the buyer and the seller. But Uber is neither a buyer or seller, it’s a broker. And as a broker, it shows the buyer and seller only what it wants to. Its algorithm is not regulated nor is it transparent, so neither the buyer or the seller has any credible information. This isn’t a market, it’s a monopoly. It’s a special type of monopoly, an algorithmic monopoly. It may mimic market-style pricing, or it may not. That’s up to Uber.
We’ve already seen that Uber withholds supply to drive up prices, as illustrated by a text message encouraging drivers to stay home so pricing would surge. Uber denies doing this, but even the denial proves the point that Uber absolutely controls all aspects of the ‘market’. Here’s the company’s PR on the text message debacle.
“The message was a poor choice of words by the local team but its clear purpose was to get more supply on the system, not less — to keep surge pricing down and the numbers speak to that,” says Noyes. “Only 3.1% of all Valentine’s Day trips in San Diego had surge pricing. The average Valentine’s Day trip price was 2% more expensive or $0.26 more expensive on average. In addition there were 306 drivers onboarded in the 2 weeks leading up to Valentine’s Day.”
Noyes explained the bit about not activating new drivers to The Verge:
“[Noyes] explained the text simply noted that Uber did not onboard as many San Diego drivers as they could have that week because in the two weeks prior, a very large number of new drivers were added to the system,” The Verge’s Ben Popper writes. ”Earnings had been low, and the company wanted to reward new drivers with a strong holiday paycheck.”
“The company wanted to reward new drivers….” But wait, how is ‘rewarding drivers’ consistent with market pricing? Markets don’t reward anyone, they simply clear at a price. So the answer is, it’s not a market, it’s contract-pricing controlled by Uber.
Right now, the only competitive force working to constrain Uber is the open cab market (well there’s politics, but that’s being swept away effectively). As this disappears, will Uber’s algorithms, aka the magical market, adjust as well? I think we can count on it. Uber believes in supply and demand, and when Uber is the only supply, well…
The second problem is simpler to explain. Cab drivers have a history of discrimination, whether it’s not picking up African-Americans or refusing to go to certain neighborhoods. Uber solves this problem, as Latoya Peterson explains in Racialicious. Here’s a sample comment.
A good example of race, class, and gender intersecting and the cost of racism and sexism. As a black woman I don’t get discriminated with Uber and feel safer than hailing a cab since my ride is tracked but if I couldn’t afford Uber, oh well. I take Uber all the time and have never been sexually harassed or treated rudely like I have the many times I’ve taken cabs in DC over the past 10 yrs.
Getting rid of racism is a good thing. But in eliminating one problem, this service introduces another. You have to have a smartphone and credit to use Uber. As Uber displaces the regular cab market, racism as a screen for cab drivers will decline. But the new screen, which will be contained in the magic market, aka Uber’s algorithm, will be whether you have a credit card and a smartphone. That means you can’t give someone twenty dollars for cab fare. It means that an entire slice of the population simply can’t get into Uber’s magic market.
And three, Uber is quietly gaining enormous power, almost feudal power, over its drivers. Remember, Uber wanted to ‘reward’ drivers with a great paycheck. This works both ways. Are you an Uber driver who is complaining too much about Uber stealing your tips? Well, gosh, it seems like the magic algorithm keeps giving you bad customers. Or no customers. Or think a few years down the road, when there is nothing but Uber in certain localities. Then Uber can raise prices on consumers, who may have other options and can squeal. But it can also lower prices paid to drivers, and these drivers are dependent on Uber for their livelihood. In fact, Uber is even starting a financing program for its drivers, so they can get loans for cars.
Remember, the customer doesn’t even pay a driver, the payment goes through Uber. What are these drivers going to do when Uber totally controls the market? Sue? Ha, not if they want the algorithm, I mean the market pricing, to ‘reward’ them. And let’s be clear, when a company offers low cost financing for capital investment for independent contractors and controls all aspects of the transaction and customer relationship, these are no longer independent contractors. They are employees. Only in this case, they are employees who have taken on debt to work for Uber. Uber has figured out that it is cheaper to trick people into thinking they are independent contractors and get them to risk their capital. Then Uber can happily take the profits. I guarantee you, if Uber thought its capital would be best used to run a fleet of cars, it would simply hire people straight out to be drivers. That it’s not doing that suggests something.
Uber is a fascinating and convenience-inducing shift in urban logistics, for now. I’ve used it. But what the company is really doing is supplying a governing service, replacing taxi commissions, and taking a fee for doing that. This means no input from the public, and since the public seems to hate politicians these days, maybe that’s what people want. But still, to the extent that there is interest in democratic decision-making, algorithmic monopolies are something antitrust authorities should watch. Right now Uber is wringing a lot of inefficiency out of the taxi industry. But eventually it will have so much power that it will introduce problems of its own.
Uber used to be called UberCab, with the goal of bettering all the cabs out there, creating an indispensable service. It’s nearly there. Soon after starting, it removed ‘cab’ from the name, and is just called Uber. Now it’s expanding into new areas.
What’s next? Maybe everything.