Tuesday, November 6, 2012

Facebook Knows You Voted, Can Advertisers Too?

Voted Yet? Facebook sure knows.

As anyone who has logged into Facebook today, they are bound to be bombarded by two similar but very distinctly different things on their newsfeed: people posting about their voting and Facebook making a post about each user saying they have voted. Two of the almost exact same statements, yet each having hugely differential implications for Facebook and its long term outlook and strategy in the years going forward. 

One of the good things about seeing either type of notification that your friend voted is the social influence that it has on your actions on the first Tuesday of November. According to a study done last month by researchers at the University of California San Diego, seeing the Facebook notification about voting caused an extra 300,000 potential voters to head to the polls in 2010, when turnout was at a dreadful 37%. But, Facebook's kind, if not nagging question of if you've gone to the polls and done your civic duty, isn't there primarily for building up voter turnout, but rather there to get a deeper understanding of who you are and fill in greater details about you.

The major way that Facebook is able to make money, is by selling ad space to advertisers based on what Facebook knows about you. They get this by having you voluntarily submit information about your likes and what you do, like stating that you have voted in a past election, either by Facebooks submission, your own status update or both.  What is the key difference between the two very similar statements that are posted on Facebook? In one word: targetability. When someone posts a status like the one to the left, Facebook has little ability to to use this information to allow for advertisers to target you and better target their advertisement. 

They can post a fleeting ad but, the status doesn't get ingrained into your profile for advertisers to better utilize. They might be able to serve an ad based on the words in your status, like "voted" but the status doesn't have any staying power to fill out your profile and who you are. Rather, by having you update your status with a binary, "Facebook Approved" status, that can either be "Yes I voted" or "No I didn't vote", Facebook allows for this to deeply ingrained into your profile. This has huge implications for Facebook in the future.

One of the biggest things that may do is allows for advertiser to more granularly target people on Facebook. For example, advertisers could want to target those who have voted in previous elections and are Republican, two factors that Facebook has at the ready, as users volunteer them when making their profile and upon voting. While Facebook has not yet rolled it out, the ability for them to is as simple as flipping a switch on their back end. The big implications for this data is when the next round of elections rolls around. One of the big pushes over the past few election cycles has been the GOTV or Get Out The Vote message. If Facebook allows for advertisers to access the voting information, political campaigns can tailor advertisements to specifically target voters who haven't voted in the prior election, but are registered for a specific party. 

I've sent Facebook a message to inquire how and if they will be using the data they are able to access for advertising purposes. I'll be sure to update the post when I hear back.

Thursday, November 1, 2012

The Surge that Caused the Surge

As Hurricane Sandy bore down on the Northeast, companies made preparations on how best to cope for the storm. However, while other companies made defensive plans, Uber, the renegade taxi company, went on the offensive. Much like in times of high demand, Uber implemented surge pricing within New York, doubling the cost of a car pick up due to the impact that the storm had placed on New York City. As soon as they flipped the switch, people cried out in complaints that Uber was engaging in price gouging, intentionally taking advantage of customers in their time of need.  

After the public outcry, Uber quickly stopped charging customers the doubled fare, but paid the drivers the difference. This morning, they announced that they could no longer afford to keep paying the differential, and would have to charge the customer the full surge price. Is this price change price gouging or just the basics of supply and demand taking their toll on a market? 

What makes Uber so different from traditional taxi and limousines companies is that they do not own their own car fleet or pay for drivers for the cars. Rather, they provide iPhones to each driver they enlist, that allows for the driver to pick up fares that are called for from the Uber app. The drivers app keeps track of the total distance traveled and the total cost of the ride, and when the customer arrives at the destination their credit card is automatically charged. Uber takes a 20% cut of the transactions cost and the driver gets to keep the rest of the fare. However, when the market equilibrium is out of sync (more demand for drivers than available supply) , Uber will multiply the price of the ride using what they call Surge Pricing, which they notify the customer up front that they will be charged a much higher price than they are normally used to. This is usually the case on nights with high demand, such as New Years Eve, when the pricing multiple can get up to 7x the normal price causing a 1.5 mile ride to cost over $100.

In the aftermath of Hurricane Sandy, Uber instituted Surge Pricing, doubling the cost of rides in and around the city. As people saw this, they called out Uber for trying to take advantage of people who needed rides with no one else available to fulfill their needs. While the public relations optics of the move are less than optimal, from an economics perspective it makes perfect sense. It is all a matter of supply and demand and what happens when one or both are disrupted from their normal point. When a market is functioning normally supply and demand intersect at a point (called the equilibrium point) which bases the best price that the market is willing to pay as well as the best quantity that the market will provide. When a market is disrupted due to some external event, supply and demand can change causing a new equilibrium point and a new price and quantity. 

In the aftermath of Hurricane Sandy, drivers who would usually go out and pick up passengers would prefer to stay at home with their family and loved ones. In other words, they felt that the normal price that they were getting from Uber to pick up passengers was not enough to compensate themselves for the extra work they would have to do. In response to this, Uber tried to make going out to pick up people worth it to the drivers, by doubling the amount that drivers would get as a cost for providing the same ride. As the law of supply states; the more people are willing to pay for a good or service the more of said good or service suppliers will bring to the market. In other words, as Uber increased the price of rides, more drivers would be willing to drive for Uber, since there was more money in it for the drivers themselves. 

While it may make perfect economic sense, it leaves legal and ethical considerations in its wake. New York has a rule against price gouging, stating that during times of emergencies no business may charge "an exorbitant amount" for a good or service. New York does not lay out what constitutes an exorbitant amount and what does not, leaving many cases of suspected price gouging up to the circumstances surrounding the case. However, just across the Hudson River, in New Jersey, a price increase of more than 10% in times of an emergency is considered price gouging and causes levying of huge fines against the gouger. While Uber did double their prices, increasing them 100%, it is not an immoral or unethical action, given the circumstances. Where price gouging is especially harmful to consumers is if all suppliers for a certain good or service increase their prices exorbitantly. In this case, only Uber raised their prices after the storm hit. If a customer did not want to pay the higher price, they could have called for another car service or taxi service. These providers were probably not charging as much as Uber was, however there probably weren't as many cars available for rides as there usually were on a sunny day. 

For an example of where supply and demand do not change drastically in the aftereffects of the storm, was at gas stations. While complaining about the price of filling up at the pump is one of Americas favorite pastimes, the price of gas did not change so drastically. What did change was the demand for gas, since it was in need for much more than just driving cars around. In the aftermath of the storm, gasoline-fueled power generators were what many New York residents were using for power, causing the demand for gasoline to rapidly increase. If gas station owners were allowed to charge what supply and the increased demand had suggested, the price of gasoline would have probably spiked over $5 and perhaps gone to $6. However, since gasoline is such a ubiquitous good, gas stations would be hard pressed to rapidly increase their prices. Since they did not increase their prices to keep up with the increased demand, large lines formed at every gas pump. 

This is hardly the end of the story for Uber, as they put the Surge Pricing back on for New York consumers, while waiving the 20% cut that they get from each ride. As the days and weeks go on, Uber may find that their model of charging what the market is willing to bear may not be worth the increased PR troubles or they may feel that in times of increased demand or decreased supply, these price changes are good ideas.