A few days ago, I got ready for a meeting, switched on my Uber app, saw that there were no taxis available in my area, and remembered an earthquake.
More than two decades ago, when I was in college in Pune, an earthquake ravaged the region of Latur. I got together with some friends to collect money for relief efforts. We decided that we would go to the affected areas ourselves to figure out the most efficient way of using the money. We hitched a ride on an ambulance of paramedics headed there with medical supplies. While in the affected district, we stopped at a village where around half the houses had been destroyed, and only one grocery store was still standing. “They are the only place one can buy groceries from,” a resident complained to us bitterly, “and they have tripled their prices.” That made me very angry. “Exploitative bastards,” I thought to myself, “feeding off the misery of others.”
Today, I know that my reaction was misplaced – just like the complaints of everyone who’s taken issue with Uber’s dynamic pricing. In case you missed the controversy, cabs and autos in Mumbai recently went on strike to protest against the competition they got from the likes of Uber and Ola. Since people had to get to work, the ironic short-term beneficiaries of this were the very parties they were protesting against. So when demand for a particular product or service goes up and supply can’t keep pace, what happens? That’s right, the prices go up, and Uber uses a mechanism called dynamic pricing which is an incredibly efficient way of arriving at an appropriate price for their service based on demand and supply. So commuters who switched on their Uber apps in the morning were informed that the base price had gone up by as much as 5x. Naturally there was much outrage and shouts of ‘exploitation’ and ‘predatory pricing’, and Uber, rattled by the bad press, announced that they would suspend dynamic pricing for the duration of the strike, and operate at their usual base fare. They put this into effect, and I woke up the next day, switched on my app, and found that no Uber cab was available.
Do you see what happened here? When demand goes up relative to supply, two things can happen. The price can go up to reflect the growth in demand; or, if the price is fixed, there is inevitably a shortage of the product or service in question. In Uber’s case, with their dynamic pricing disabled, all their cars quickly got booked, and whichever customers switched on their apps after that found that there were no cars available. Their need could have been urgent: they may have needed to rush to the airport to catch a flight they couldn’t afford to miss; or take an aging relative to hospital; or head to town for a make-or-break meeting. But even if they were willing to pay more, too bad.
The most efficient way of allocating resources is to let things find their own equilibrium, their own prices. Price controls are foolish and never work. And the demand for them is based on a sort of a fantasy. Fixing the price of a product at a base price below what the market would pay does not mean that everyone gets it at this price—it just means that a lucky few get it and the others don’t. The fundamental truth about the universe is this: everything is scarce. You can’t wish this scarcity away by agitating or legislating against it.
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Speaking of prices, another company that disrupted an industry, Amazon, has announced that it will pay authors on its Kindle direct publishing program according to pages read, not units moved. This is an opt-in program, applying only to self-published authors on their DP platform, but authors on my Facebook timeline have already reacted with horror. Their instinctive aversion to the idea is understandable: commoditization of art and all that. As in the movies, they can imagine a publishing executive in a suit telling them to clip their novel by 30% and have only one 8-letter-word-per-100,000 because more than that diminishes page-turning rate. The horror! But those fears are overblown. I think this development, like almost everything Amazon has done with regard to books, is visionary and good for authors.
Look, there isn’t, and shouldn’t be, a central politburo that decides how much authors get paid according to some high-falutin notions of literary merit. Authors get paid, quite simply, based on copies sold, and how many people want to read them. Literary authors accept that they will not make remotely as much as those who write airport potboilers. That’s just fine, because if they’re good at what they do, they’ll find an audience that appreciates their work anyway.
Amazon’s new system achieves the same end—paying writers according to the demand for their writing—with greater granularity. Good literary writers will still make money – I devour every word Alice Munro or Anne Tyler write—because their work is compelling. But if I get bored with a writer after reading ten pages of his work, I don’t see why he deserves any more of my money than those ten pages represent.
It’s somewhat silly for an author to have a sense of entitlement, and believe that other people should pay him money even if he can’t produce work they want to read. As silly, indeed, as for an Uber user to feel entitled to the service at a lower price than others are willing to pay, at the expense, therefore, of the service provider. Such arrogance is priceless.