Digital Disruption & Marketplace Distortion

Is Digital Disruption distorting Marketplace?

Digital Disruption is changing fundamental economics and potentially distorting marketplace. It is far deeper than convenience and a medium to reach customers. It (digital) is changing the fundamental economics of pricing and potentially increasing the risk of creating monopolies or duopolies and distort the marketplace.

Have you heard of serge pricing? Do you remember, UBER/OLA prices going 6x-10x during the peak demand hours? Does above picture sound familiar? In other cases, do you recall booking a flight ticket or a hotel room and always wondering how come prices surge so rapidly and then some of your friends getting same ticket booked at even a lower price even on a later date?

As it impacts so many lives and almost all of us, couldn't stop myself from having my view on the case and come up with some recommendations to improve the situation.

In order to analyze the situation, we have to understand the basics of pricing. We all know demand and supply is the most important driver for deriving the price point of a product or service. Traditionally, there were two prominent ways to put a price tag to any product or service:

a) Cost based pricing: Selling price = cost of producing a product + margin + tax; this method is primarily used for pricing commoditized products

b) Value based (or 'Willingness to pay') pricing model: In this model, through market research, companies come to know what perspective customer segment is willing to pay for a particular product in a particular marketplace or geography. Then, companies used to price their products, a bit lower than actual 'willingness to pay' price point, maximizing their profits, however, still creating additional value for customers - win-win situation for both producers and consumers.

A Point to remember is that 'willingness to pay' price point is achieved through collaboration between producers and real consumers.In this (survey) context, consumers are not influenced by their need at a moment or their ‘compulsion to buy’ the product at that moment. It was not a monopoly situation or consumers didn’t have any specific need for that product, so it was a fair measure of value based pricing done even before the product launch.

However, digital coming into the picture is changing the basic pricing dynamics and we run a risk of 'momentary monopoly'.

With the advent of digital, companies are able to track their customers almost in real time, therefore creating opportunities for companies to surge the price at the last moment when customers have already gone through the decision making process 'DMP' and almost ready to buy. Now, since companies know that customers are almost ready to buy the product and therefore chances of consumers moving to another platform is almost negligible, then they (companies) increase the price, or, in many cases, consumers would not have any choice, creating 'momentary monopoly' like situation. Example coming to mind is, aviation sector, hospitality sector and transport match-making platforms such as UBER and OLA. Think about a situation that, you got to go somewhere and you are about to book a cab and then suddenly they surge the price to let's say '6x' or more– now, while you are already getting late, you have to catch a flight or train and you are not sure about traffic conditions, in this case would you have a choice? Theoretically 'Yes', but practically 'No'. Doesn’t this smells like a monopoly?

This all is possible because of technological advancement enabling companies to adopt rule/algorithm based dynamic/surge pricing. While, I gave examples from the transport industry, potentially, same business model can be adopted by some other digital companies as well, such as Amazon, Alibaba etc...

Now, while ‘digital’ is leading business model change and is fundamentally changing the way we conduct our business and the way we live our life, dilemma is, how to handle situations like this without compromising with 'free market' concept? There are very few choices of making the marketplace really a free marketplace: particularly in case of UBER/OLA kind of platforms:few options to consider are,

1.      Auction based pricing- different sellers should be allowed to show their price and then let the consumer choose what they want. What I mean is, UBER/OLA or these aggregator platforms are not the right party to put a ‘price tag’ and should not be allowed to decide upon the price.Cab drivers who want to participate in the marketplace should be allowed to quote the price and then UBER/OLA or aggregator should be adding their commission that should be the final quote price. And then aggregators should be to show this price, driver rating and distance for different drivers and let consumer choose.

Additionally scenario, as cab drivers would also want to maximize their profits, potentially aggregator may collude with cab drivers and come up with ‘innovative’ proposal to cab drivers that, drivers pass-on the pricing control to aggregators with a base price in that case also aggregators would be able to manipulate the market.

2.      Wrapper based marketplace - creating market competition: there should be aggregator of aggregators, which should be providing listing of all the aggregators along with their pricing, rating and ‘lead time to reach’ to customer destination, giving options to choose the best option for consumers. For example, an aggregator of aggregators should display different options from top 3 or 4 aggregators and let the consumers choose.

3.      Regulatory framework - While, I believe in ‘free & open’ economy and ‘full competition’, however providing a regulatory framework and making sure ‘free and open’ market and ‘enough competition’ is one of the most important task of our governments/market regulators. While regulator should not control the market, but keeping fine balance between free markets and limiting monopoly/duopoly is the prominent role of regulator. The regulator should provide maximum permissible rates beyond which aggregators can't go. This is a balance between free market, enough competition and choices for consumers.

Distorted marketplace: In case of taxi aggregators, aggregators are at a competitive advantage, because, while there is just no maximum price control on aggregators, their competition, autos and local cabs are under price control/regulation. Additionally, the same practice is prevalent in the aviation sector and hospitality sector as well. While booking the flight tickets or hotel room, these aggregators or booking sites keep track of you through cookies and then they keep on judging your need and surging the price.

Counter View: If we suggest this to UBER/OLA executives, they will passionately argue that if we don't create enough of incentives for product suppliers (in this case UBER/OLA drivers) there is a potential risk that suppliers may not participate in the marketplace and consumers would be deprived of services/products. My response to above argument would be, let product suppliers decide the price point at which they are willing to participate, aggregators shouldn't be making most important decision of this value chain i.e 'pricing point' rather that is the jurisdiction of the service provider (drivers) and that is what is central to my argument. In this case there is no conflict that cab drivers would not participate because, they only are quoting the price at which they want to operate.

Final recommendation: While aggregator platforms are relatively newer and, like many other new business models, would take some time to mature, aggregator platforms should play their real role of aggregators and ‘pricing’ should be the responsibility of real produce of goods/services not of middlemen therefore aggregators should not be driving the ‘pricing’ in the marketplace which gives aggregators undue competitive advantage distorting the market. Pricing should be decided by the real producers with a suggested maximum cap.

Having said that, while these aggregators are enabling the competition in many ways and are integral in making our lives much more simpler and convenient, intent is not to de-mean anybody’s contribution but to make our system even more convenient and giving consumers more choices. 

Disclaimer: Views are my personal views!

Manish Gupta, MBA - University of Oxford

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