On technology and its aid to increasing market efficiency

Approximately fifty-eight percent of Saudi Arabians used smartphones in 2018 (or about 19.4 million people). As people begin to use more technology and as it advances further, databases and applications begin to know how and when to target us for advertisements as well as who they should be advertising to. For example, as part of Facebook’s ad customization options, pages can market their content with varying extents of detail towards their specified target market (age, gender, and education level are three standard options – but they can also target your perceived political orientation in the United States, for example, or your interest in Middle Eastern cuisine). Meanwhile, ride share apps use the rise of technology to provide their entire service; from connecting individuals to their gig career to simplifying the rideshare process. Having said that, technology has also made it easier for applications to tweak some prices in their market. The concept behind charging different individuals different prices for the same service is known as price discrimination*, and the extent to which it is involved depends on many factors.  

            There are different strategies to price discrimination. A common pricing strategy used is dividing the market into several, smaller markets that the seller can then label and set the price to accordingly (for example: domestic or foreign). This strategy can also take place under a process known as the ‘two-part tariff’ (not to be confused with foreign market tariffs). Under the two-part tariff, a company charges consumers in different markets the same ‘entrance’ fee, then different prices afterwards. Consider a gym, a television subscription, or even printers – you buy the entrance fee in the form of the subscription (or the printer) then continue paying smaller fees (ink and paper in the case of the printer, monthly renewal in the two other cases) as time goes on. While the two-part tariff is also common, ride sharing applications mostly depend on first degree price discrimination to tailor their costs to the person ordering the service. First degree price discrimination is the theoretical ability to know how much every consumer in the market is willing to pay – and giving them that price. This has become increasingly simple with more access to information.  

Access to information is not the only thing needed for suppliers and businesses to be able to price discriminate. Other than being able to separate the markets, the business in question must have some extent of market power. Businesses with a lot of competition and substitutes will find it harder - if not impossible - to attempt to set different prices for different markets. Furthermore, the good itself must not be able to be resold, or, reselling it must be marginally more expensive a procedure than the prices in the other markets. Ride share applications are able to collect information about you from the information you provide - whether that is your phone battery percentage, where you are located, or if your credit card is associated with another business, so they are easily able to classify you into a market. Furthermore, they do have market power - especially seeing as there are not many substitutes to the ride sharing applications currently in power. Finally, there is hardly a way possible (or even an incentive) for someone to sell the price set on their ride share application. In the Middle East, these business have grown increasingly more powerful as in many countries within the region driving is considered a dangerous or tiring activity, leading people to look for substitutes.

             In a market such as Saudi Arabia, where it is considerably dangerous to drive on the highway as road accidents are a high probability, ride sharing applications provide a fair share of revenue. In 2019 alone, ride sharing applications earned $1640 million U.S. dollars in revenue. Careem, one of the ride sharing apps allowed in Saudi Arabia, is the only tech unicorn** in the Middle East. As such, a lot of Saudi Arabians depend on ride sharing applications on a daily basis; especially considering that the two largest applications – Uber and Careem – are now run as part of the same company after Uber bought Careem in 2019. This brings the companies more information about individuals and their purchasing habits. Just like flight websites, who will show you higher prices if you keep searching the same flight, ride sharing apps will use the information you provide them to offer you prices different than other people. This information could range from how often you use the app, the location you are in and are going to, to even the credit card you have connected to the account. In an interview with Bloomberg, Uber’s head of product commented that the company is in fact using machine-learning techniques in order to tailor their prices towards the prospective buyer. With the knowledge acquired about how dependent consumers are on their product, companies can begin to be more detailed in their approaches to pricing and as such rake in more profits than seen before.

            While this may seem as a negative thing for many people, it is definitely a positive aspect of technology for upcoming businesses to be able to use. In an age where much of our data is visible online (your browser stores cookies, for example, on the websites you’ve visited before) as well as the data that can be collected about our own habits using the applications in question, it is becoming more viable to approach first degree price discrimination using technology. This is not entirely negative for consumers, as while some people will be paying more for the same product – others will also be paying less, this provides a more efficient, more accessible outcome for many individuals. Yes, it can be scary to imagine the information that applications can collect about a person; however, not all of it is used for harm. Price discrimination is simply another method for businesses to become better at staying in the market and better at engaging all possible customers.

Notes for further understanding:

*the math behind this is relatively simple even if the terms are difficult – firms usually price their products to be sold to maximize their profits (the difference between the total cost and total revenue). In order for them to do this, they find the perfect pricing point that would generate the most profit. Price discrimination is fairly simple to explain using monopolies – while many firms might choose to maximize profits by pricing at where every good is sold at the cost of producing it, monopolies can choose to sell at a higher pricing point. This decreases consumer surplus, or, the extra money consumers would have been willing to pay. Price discrimination simply finds a way for firms to gain all the consumer surplus in the market, which provides firms with more profit than it would otherwise be able to get – up until it prices the product above the willingness to pay for everyone in the market, then losses begin to ensue.  

** a tech unicorn is a company that has been valued to be worth at or above one billion dollars

Citations and further reading

Aswad, Celine. “Saudi Embrace of Ride-Hailing Apps Drives Economic, Social Change.” Reuters, Thomson Reuters, 8 Jan. 2017, www.reuters.com/article/us-saudi-economy-ridehailing/saudi-embrace-of-ride-hailing-apps-drives-economic-social-change-idUSKBN14S08G.

Bostock, Bill. “I Took a Careem, the Ride-Hailing App Uber Snapped up for $3 Billion to Dominate the Middle East. It Was Clear Why Uber Wanted It.” Business Insider, Business Insider, 2 Feb. 2020, www.businessinsider.com/careem-app-middle-east-ride-hailing-uber-2020-1#one-thing-that-caught-my-eye-was-the-cash-payment-feature-and-its-something-you-could-imagine-creeping-into-the-uber-app-soon-21.

Carey, Scott. “What Is a Tech Unicorn? - a Quick Refresher.” Techworld, 19 Apr. 2016, www.techworld.com/startups/what-is-tech-unicorn-3638723/.

Nicholson, Walter, and Christopher Snyder. Microeconomic Theory: Basic Principles and Extensions. Cengage, 2019.

“Ride-Hailing & Taxi - Saudi Arabia: Statista Market Forecast.” Statista, www.statista.com/outlook/368/110/ride-hailing-taxi/saudi-arabia#market-globalRevenue.

“Ride-Hailing & Taxi - Saudi Arabia: Statista Market Forecast.” Statista, www.statista.com/outlook/368/110/ride-hailing-taxi/saudi-arabia.

Staff. “Uber to Acquire Careem To Expand the Greater Middle East Regional Opportunity Together: Uber Newsroom Egypt.” Uber Newsroom, 26 Mar. 2019, www.uber.com/en-EG/newsroom/uber-careem/.