August 10, 2017

A Bigger Problem Than Income Inequality

     If you walk into a restaurant and ask to buy a typical meal, it will probably cost you somewhere around ten or twenty dollars.  If you asked to buy ten of that same meal, it would cost you about ten times as much.  We consider this ten fold price increase to be fair because the average person understands that if you buy ten meals, the business owner needs to buy ten times as much food supply, and the server must do about ten times as much work to prepare, deliver, and clean up after you have finished.

A Fair Price To Solve A Real Problem

     This basic tenant of 'fairness' in pricing is fundamental to our sense of satisfaction when participating in a market economy.  Even in cases where a price might be seen as too high, or exploitative, most people would generally agree that the high price will either be corrected by a lower price offered by a competitor, or simply by moving to a different time or place where the cost is more reasonable.  In this case, even exorbitantly high prices can be seen as somewhat fair since one can reason that the seller is simply being rewarded for having their goods or services in the right place at the right time, which for the most part, is an opportunity that is equally available to anyone motivated enough to pursue it.

     Lately though, I've become increasingly aware of pricing models that fail to pass the 'fairness' test by varying degrees.  If a vendor wanted to sell bottles of water to you based solely on how much you needed it, say at $100.00 for anyone about to die of thirst, and $1.00 for everyone else, most people would agree that this isn't a very 'fair' pricing model, since it has no merits with the cost of the product or service itself and it has equal burden to the vendor in either case.  Regardless of whether such a pricing model may be legal, the point is that it builds resentment and most people would agree it's not desirable to have a society that works this way.

     The question of fairness starts to get murky when you consider anything that involves economies of scale:  The raw business cost of allowing a first customer to make a single phone call from Canada to China is many billions of dollars due to the cost of building the vast telecommunications network required for the call in the first place.  The second call costs effectively zero by comparison, and similar is true for the many millions of customers you add after that.  In this case too, it's not too difficult for most of us to reason that it's still relatively fair for us to pay $50 or so dollar per month for access to the phone network.  We understand that each customer's money is pooled to support the rather large aggregate cost of the infrastructure, and if none of us agreed to this payment model, then the telephone network would not be able to exist in the first place.  In this situation, there is a physical constraint that the telephone infrastructure provider must overcome in order to provide us with what we are paying for.

     Where pricing fairness starts to go completely out the window is in situations where there is no relationship between the pricing model, and the vendor's burden of providing whatever we are paying for.  In other words:  Situations where the vendor creates artificial barriers that did not need to exist in the first place in order to provide us with what we want.  Sometimes, it's just hard to see the real physical constraints that the vendor has because of economies of scale, but my observation is that the justification of what we're actually paying for is becoming weaker and weaker.

A Less Fair Price, To Solve Questionable Problem

     When I log into my bank web site now, I see a message that says "a fee of $1.50 will be charged in the currency of the account for each cheque view. The fee will be debited from your account the next business day.  You may view the same cheque as many times as you wish during your EasyWeb session at no extra cost."  As a web developer, I can tell you that there isn't very much extra effort to display the cheque to you than there is to display the bank's logo on every page that's always there for free.  The image of the cheque is processed and stored by the bank regardless of whether you look at it or not, and the bank already gets to charge you money for buying the cheques, but also for cashing them as well.

     Here is a Greyhound bus ticket that I bought a couple of years ago:

     Before I bought the tickets, I checked their web site and found that the tickets cost around $12.00.  After buying the tickets, I find out that there is an extra 'FAC' fee of $2.65.  Not a big deal, but what's this extra fee about?  After some Googling, the internet claims that this is some kind of facility improvement fee that they charge when you buy the ticket at a physical location.  But I didn't make use of the facility?  If you add the cost of the fee to the base price of the ticket, and the HST, the total comes to 16.43, not 16.78.  Turns out they charge HST on top of the 'FAC' fee, but don't bother to write that on the ticket.

     If you've ever flown with any airline, you already know about my next example: 'Airport Improvement Fee', 'Convenience Fee', 'Fee Fee'.  As of today, I'm checking Pearson Airport's list of fees page.  It turns out they even have a special 'Connecting Passenger, Airport Improvement Fee' of $4.00.  This way you can pay a fee for visiting an airport that you didn't even want to visit in the first place.

     eBooks are another good example:  They're substantially more restrictive than the original print media it was designed to replace.  With these, you'll find lots of pricing models that impose artificial constraints based on the number of and type of devices you want to download them onto.  These restrictions don't fundamentally need to exist, and it is in fact extra work to actually implement them.

An Unfair Price To Solve A Manufactured Problem

     Because our idea of what a 'fair price' is has been slowly eroded by the presence of economies of scale and their complex veil of technology, the logical conclusion is that companies will eventually develop pricing models that charge people whatever they want, whenever they want, simply on the basis of you being able to pay them the amount that they want.  Direct price discrimination based on a person's income level isn't likely to be legal, but that's OK!  Just make up some kind of 'We Want Money So Give It To Us Fee'.

     But why would people pay money to support a system that presented manufactured problems that didn't exist in the first place?  That brings me to one of the main points I want to make in this article:  People are losing touch of what problems are real and which are manufactured in the first place.

     If you buy movie tickets online now, you'll likely get charged an extra 'convenience fee' for doing so.  But that's fair, right?  You paid more because someone had to build that site, and it costs money to host it...  But wait, wouldn't they actually be saving money by having you buy it online?  A large movie theatre chain only needs one web site, but would need hundreds of ticket agents.  Surely, the web site costs less to maintain than hundreds of extra employees.  Are you really paying them money because it helps them provide better service, or are you paying them money so they can make more money?

The Dystopian Future

     Keep in mind, that I'm not actually certain that we'll end up with a dystopian outcome, and it may be the case that market forces eventually start favouring more ownership and control for the consumer again.  Having said that, here are a few things to think about:

•      Car companies are pushing to make it impossible to do mechanical work on your own car.  My father has done mechanical work on vehicles all his life, and he says that now when he needs some basic maintenance done, he takes it to the shop to get someone who is certified to do it.  Otherwise, you'll end up voiding the warranty.  This business model is working out for mechanics, but what would really be good for car companies, is if you had to get the company's mechanics to work on the car.  Some people might be willing to risk voiding the warranty to work on their own car, but they would probably be less willing to break the law to work on their own car.  As of today I believe it would be very difficult to create a law that made it illegal to repair your own car, but I anticipate that in the future when driverless cars and their economies of scale start to pick up it will become much easier.  The easiest way for car companies to do this would be to slowly push more and more liability onto the mechanic who did the repair until it becomes prohibitively dangerous legally to touch anything on the car at all.  I'm sure insurance companies wouldn't mind the opportunity to push the burden of liability elsewhere.
•      In the time between writing the first draft of this essay and proof-reading it, I experienced another first-hand automotive example:  My parents recently purchased a new car that comes with a digital camera view of the rear of the car when you back up.  This display also presents the radio and various other controls.  Unfortunately, it stopped working a few weeks ago, and since it's a piece of digital equipment, basic knowledge of 'how to work on cars' isn't enough to fix it.  The solution is to take it to someone who does this for a living and get them to fix it.  The problem with this is that even they don't know how to fix it: Their solution is simply to order another $800 unit and replace the entire thing.  To make things even worse, after ordering the new unit, the original broken unit spontaneously started working again the day before it was to be replaced!  The technician who was to replace the unit could not offer any explanation for why this would happen.  Based on the intermittent behaviour of the problem, my suspicion is that there is a small flaw in the PCB design or the fabrication process that causes components to short out during certain vibration or heat/humidity conditions.  If you knew exactly which component to fix, I wouldn't be surprised if you could do it for less than a dollar.  But why would the company bother to tell people this or educate them on how to do it if they could just get another $800 for a brand new unit?
•      Something that I don't think people fully appreciate is that when driverless cars become ubiquitous, what will likely follow is a sense of loss of control and loss of personal identity associated with it.  People will think that it's normal to drive around locked inside a box while being bombarded with advertisements or surprise detours.  Unless you plan to walk everywhere, you'll end up spending virtually all of your time outside your house in a place that isn't in your control or possession.  For many people who drive today, I suspect they don't believe that the population would submit to a complete loss of the ability to drive your own car, but the people who truly matter in this regard are the children of the people who drive today.  When you've never had that kind of control in the first place, and no one around you has it, you probably won't be that offended when you're never offered it in the first place.  There are also a number of solid arguments that car and transportation companies can use to shut people up who want to maintain their ability to drive:  "Driving a car is too dangerous".
•      Net Neutrality in all its forms is effectively a subset of what I've discussed in this article.  It's a problem that people are already familiar with and it keeps coming up over and over again.  It seems inevitable that eventually the right bills and laws will end up getting sneakily passed to allow ISPs to do what they want.  There is also another problem in fighting for net neutrality that I don't see people talk about a lot:  It's related to point I mentioned earlier about economies of scale.  There are real and fair cases for saying that people who consume more resource should have to pay more, and I expect that internet service providers will attempt to confuse people by conflating this meaningful justification for pricing models with their own manufactured problems and pricing models.  For example, we consider an internet service pricing model that charges based on amount of bandwidth consumed to be fair:  It doesn't matter where the zeros and ones come from, it just matters how many of them you use.  But can you charge people less if they start hitting your cache a lot?  There is no ethical dilemma for ISPs to use caching to speed up access for frequently used resources, but this implies that the resource cost is now imbalanced.  People who hit popular content in the cache will get charged less than those who hit infrequently used content that is not cached.  For most people this pricing model can end up being awfully similar to one where people are charged based on the type of content they access, which is exactly what we don't want for the internet.  Even if you don't like this example, you can make many similar arguments for any algorithm that is employed in attempt to consume less network resources by exploiting patterns in resource use.
•      Software products like Microsoft Windows have already started an obvious shift from package and ship software, to a full software as a service model.  The last version of windows ever has been released, and it only seems like a matter of time before it's offered as a monthly service.  This is just part of a larger trend of companies to make a service out of everything.  Why get $100 now, when you can get $9.99 forever?
•      Allan Greenspan's current analysis of the US economy has pointed out that many companies are sitting on huge reserves of cash and that investment in long-term assets is decreasing.  This is likely due to many companies being uncertain about the future and another (not necessarily mutually exclusive) factor is that there is less incentive to invest in owning assets when services that do the same thing are less risky and have lower sunk costs.  Greenspan has also pointed out how even though we're at record levels of high employment, we are currently experiencing a decrease in productivity.  It costs more to do less now, and that's not surprising when it costs $800 for a chance at fixing an unknown tiny component that probably costs less than a dollar.

Conclusion

     People complain about income inequality a lot these days, and with the exception of the minority who break the rules to win, most people would agree if you work harder you should have a higher income.  In this respect, you can have unequal incomes but still have a somewhat 'fair' economy.  Even if you disagree, it isn't likely that enough people will start rioting in the streets because their neighbor makes twice as much as they do.  However, what is likely to upset people is constantly being bled dry by random fees, surcharges, and taxes of a system that makes absolutely no sense to them and automatically adjusts to rid them of the little money they have.  This, I claim, is where it looks like we're headed.  This hasn't been possible historically because most people were able to understand the society that they lived in.  Something like a retail store couldn't control how people used their products in the comfort of their own home.  However, if you put a microchip in everything and hook it up to 'the cloud' you can sell functional products that refuse to work unless you pay for a subscription.

     Oh, Since I wrote this article mainly to share with my friends, I should mention that I'm moving to a subscription friendship model from now on.  For $9.99 per month you get the Starter Friendship Package™.  This comes with the standard regular email updates about my life, and no more than one personal email communication per month.  If you really want to level up our friendship, you can subscribe to the Premium Friendship Package™ for $99.99 per month.  The Premium Friendship Packages™ comes with everything the Starter Friendship Package™ offers, but in addition you get unlimited email communication with me.  In addition, the Premium Package comes with sincere[1] feelings of caring and friendship toward you.  In the event that you become extremely ill and end up in the hospital, you'll get one free[2] visit from me once per month!

[1]  Not actually intended to be a legally binding commitment.  Actual feelings of caring and friendship subject to change without notice.  Some restrictions may apply.  Sincere feeling of caring are provided on an "AS IS" basis without warranty of any kind, express or implied, including, but not limited to the warranties of actual feelings of caring which may be replaced by feelings of hatred at any time without notice.

[2]  Does not include travel and lodging expenses.