Dynamic Pricing Algorithms

A study into different methods of dynamically pricing services with variable daily supply and demand to maximize
revenue and trade.

Summary

The dynamic pricing algorithm seeks to achieve a simple approach to mimicking the Uber pricing algorithm, and shows a few different approaches
that can be taken. Below are four different pricing algorithms: Maximum Ridership, Maximum Revenue, Base Rate, 2x Base Rate. These pricing
algorithms do not take into account the individual elasticities of buyers nor sellers, but rather the collective elasticity to measure the number of
consumers still in the game at a given price point and demand. The pricing is equal for all buyers and sellers at any given time.

Supply and Demand Curves

To make the supply and demand variable throughout the day, two curves were created:
 The green line represents the
comparable supply and the red the demand. When the baseline supply is higher, it means that sellers are likely to take lower rates, however when the
supply is lower, the sellers will require higher rates (premiums) to jump back into the market.

Each rise in percent cost decreases the demand by approximately 0.3% with a standard deviation of 0.2%, and increases supply by 0.5% with a
standard deviation of 0.3%.

Consumer Tendencies

Throughout the day there is a main trendline oscillation between buyer demand and seller supply crests and troughs. Each buyer and seller has their
own deviance from this major trendline however, as they have their own particular inclination to buy or sell and a particular responsiveness to
changes in price. This should model reality relatively well as some drivers may be willing to pay a 4x premium for the service while others may not
even be interested in paying the Base Rate.

Consumer Assumptions

In this program, each consumer is given a value for probability of buying or selling and their relative elasticity to price. While we cannot know this in
the real world, this provides a good basis for simulating reality given that the program does not use individual elasticies to price on a case-by-case
basis.
By collecting usage statistics on when users are likely to buy and sell, and their responsiveness to price changes, we could apply the models above to
help find an efficient price point.

Maximum Ridership
The Maximum Ridership algorithm finds the equilibrium point at which there are an equal number of buyers and sellers at a given time to exchange.
This results in the most buyers and sellers, but not necessary maximal revenue.

Max Ridership

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Time Price Buyers Sellers Revenue
00:00 1.73x 20 20 $34.60
01:00 1.60x 13 14 $20.80
02:00 1.42x 10 10 $14.20
03:00 1.20x 9 10 $10.80
04:00 1.05x 5 5 $5.25
05:00 1.04x 9 9 $9.36
06:00 1.04x 10 10 $10.40
07:00 1.12x 10 10 $11.20
08:00 1.05x 11 12 $11.55
09:00 1.20x 18 18 $21.60
10:00 1.03x 25 25 $25.75
11:00 1.25x 38 38 $47.50
12:00 1.23x 45 45 $55.35
13:00 1.45x 47 47 $68.15
14:00 1.86x 59 59 $109.74
15:00 2.05x 63 63 $129.15
16:00 1.73x 64 64 $110.72
17:00 2.22x 67 68 $148.74
18:00 2.18x 65 65 $141.70
19:00 2.35x 64 64 $150.40
20:00 1.95x 54 54 $105.30
21:00 2.15x 53 53 $113.95
22:00 2.13x 43 43 $91.59
23:00 1.91x 32 32 $61.12

Stats
Revenue: $1508.92
Number of Riders: 834
Divers without Riders: 4

Maximum Revenue
The Maximum Revenue algorithm finds the point at which the most revenue can be made not necessarily the point where the most buyers and
sellers are being matched up. The general rule is that Maximum Revenue tends to lead to many sellers not being able to sell their goods due to a
limited number of buyers who are willing to pay higher amounts.

Max Revenue

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Time Price Buyers Sellers Revenue

00:00 1.73x 20 20 $34.60
01:00 1.67x 13 17 $21.71
02:00 1.44x 10 10 $14.40
Time Price Buyers Sellers Revenue
03:00 7.66x 3 85 $22.98
04:00 1.29x 5 8 $6.45
05:00 9.59x 1 92 $9.59
06:00 1.07x 10 10 $10.70
07:00 9.59x 3 93 $28.77
08:00 1.09x 11 15 $11.99
09:00 1.32x 17 24 $22.44
10:00 1.03x 25 25 $25.75
11:00 1.83x 27 63 $49.41
12:00 1.40x 43 53 $60.20
13:00 1.96x 41 72 $80.36
14:00 2.17x 55 67 $119.35
15:00 9.52x 15 96 $142.80
16:00 2.31x 58 78 $133.98
17:00 2.22x 67 68 $148.74
18:00 2.40x 61 71 $146.40
19:00 2.49x 63 67 $156.87
20:00 2.00x 54 55 $108.00
21:00 2.76x 45 72 $124.20
22:00 9.59x 10 98 $95.90
23:00 9.59x 9 93 $86.31

Stats
Revenue: $1661.90
Number of Riders: 666
Divers without Riders: 686

Base Rate

The Base Rate algorithm applies a base rate regardless of the supply or demand at any time in the market. This leaves potential on the table during
hours of increased demand.
At Base Rate

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Time Price Buyers Sellers Revenue

00:00 1.00x 40 7 $7.00
01:00 1.00x 34 3 $3.00
02:00 1.00x 22 1 $1.00
03:00 1.00x 13 7 $7.00
04:00 1.00x 5 3 $3.00
05:00 1.00x 10 8 $8.00
Time Price Buyers Sellers Revenue
06:00 1.00x 10 8 $8.00
07:00 1.00x 15 7 $7.00
08:00 1.00x 13 11 $11.00
09:00 1.00x 20 12 $12.00
10:00 1.00x 27 25 $25.00
11:00 1.00x 48 27 $27.00
12:00 1.00x 53 31 $31.00
13:00 1.00x 68 28 $28.00
14:00 1.00x 83 29 $29.00
15:00 1.00x 81 26 $26.00
16:00 1.00x 90 35 $35.00
17:00 1.00x 94 13 $13.00
18:00 1.00x 91 14 $14.00
19:00 1.00x 92 15 $15.00
20:00 1.00x 88 12 $12.00
21:00 1.00x 87 11 $11.00
22:00 1.00x 76 3 $3.00
23:00 1.00x 53 4 $4.00

Stats
Revenue: $340.00
Number of Riders: 340
Riders without Drivers: 873

2x Base Rate

The 2x Base Rate algorithm is a flat 2x Base Rate method that is used to illustrate the comparable difference in the supply and demand of rides at the
new fare price.

At 2x Base Rate
 save

Time Price Buyers Sellers Revenue

00:00 2.00x 13 31 $26.00
01:00 2.00x 8 27 $16.00
02:00 2.00x 4 40 $8.00
03:00 2.00x 5 29 $10.00
04:00 2.00x 0 35 $0.00
05:00 2.00x 3 35 $6.00
06:00 2.00x 1 36 $2.00
07:00 2.00x 4 42 $8.00
Time Price Buyers Sellers Revenue
08:00 2.00x 5 48 $10.00
09:00 2.00x 8 55 $16.00
10:00 2.00x 9 61 $18.00
11:00 2.00x 21 65 $42.00
12:00 2.00x 22 73 $44.00
13:00 2.00x 37 76 $74.00
14:00 2.00x 56 63 $112.00
15:00 2.00x 64 60 $120.00
16:00 2.00x 62 73 $124.00
17:00 2.00x 75 60 $120.00
18:00 2.00x 69 58 $116.00
19:00 2.00x 72 47 $94.00
20:00 2.00x 54 55 $108.00
21:00 2.00x 55 48 $96.00
22:00 2.00x 45 37 $74.00
23:00 2.00x 32 36 $64.00

Stats
Revenue: $1308.00
Number of Riders: 654
Divers without Riders: 466

Conclusion
While the Maximum Ridership is always second to the Maximum Revenue method, it provides a better market that allows more buyers and sellers to
match up. Both the aforementioned algorithms for pricing are much more effective than using a flat rate throughout the day, as the Base Rate leaves
fierce competition in the peak hours. The 2x Base Rate similarly leaves many idle drivers in off-hours as the pricing is too high for the low number of
potential buyers.

Using a dynamic pricing algorithm ensures that money isn't left on the table and efficiently matches the most drivers and riders together.

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