Willingness to pay is what constitutes one of the basic tenets of economic theory. It is what defines the consumer surplus and ultimately the derivation of demand and supply curves for industry. In fact, the first step for any firm entering the market is determining the willingness to pay. Those that can judge this accurately for each consumer and present a different price—this is what is termed as price discrimination—are able to extract more from the market than anyone else. While price discrimination or as MBAs term it “yield management” has been followed for long now—Airlines and hotels jack up prices closer to the trip—internet is now aiding companies to discriminate more discreetly.
According to a report from Bloomberg, Uber may be planning to move ahead with this model. The company in following what it describes as “route-based pricing” in the US would determine a person’s willingness to pay according to her location. Say, ordering a cab from a rich locality would cost more than ordering one from a poor one.
While many may oppose what Uber is doing, it is just one of the firsts in the age of the internet. With the service dominating most activities of our lives, one can expect more companies following the Uber model. So, ordering from a posh locality using Amazon can cost more than ordering from a poor one.
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Most companies have already been using an imperfect form of discrimination—giving more discount to smartphone users—but the model is certainly expected to change with the internet of things. A medical insurance company will be able to charge a premium as per your lifestyle or an auto insurance as per your driving habits. Whether the likes of Uber, which are already in a political muddle given their pricing models, will be able to implement this successfully given the government crackdown is something that remains to be seen.