Yandex Algorithm Pricing Hopes to Defuse Criticism

Since February this year, users of Yandex’s ride-hailing app are shown a demand index.

A color indicator on the app's main screen helps to determine the trip price before ordering a car. Green means the standard rate is applied while yellow, orange or red indicates heightened demand in the area affecting the price. Upon clicking on the indicator, a brief explanation pops up showing the ratio of trip orders versus available taxis and a list of influencing factors such as traffic intensity, bad weather and if there are enough free taxis in the trip start and end areas.

Possibly, this is in response to high-level of criticism of dynamic pricing systems used in ride-hailing. This January, the Youth Parliament at the State Duma complained to the Federal Antimonopoly Service of Russia (FAS), the country's antitrust authority, about a sharp rise of trip prices in the pre-New Year period at the four largest ride-hailing companies. The Parliament also suggested that the taxi booking apps may charge higher prices to premium mobile phones.

Concerns about dynamic pricing

The on-going scrutiny motivated Yandex to better educate consumers about its dynamic pricing model. According to it, the price is calculated automatically based on the local demand-offer balance. It is also affected by factors influencing a trip cost for a driver. For instance, dense traffic, downpour or ice make a trip longer, so, a price multiplier is used to attract more drivers into the area.

“However, the pricing algorithm is overtly complicated and non-transparent,” said Dmitry Shapochkin, CEO at Ocean Taxi. “Yandex’s fare calculator comes with a 10-page description of variables which contains non-transparent coefficients allowing for price manipulations.”

Worse yet, users cannot know the price before clicking ‘book’, he said. The concern is heightened from knowing that the demand in taxis is very elastic: “When fares surge by 25%, demand drops two times. In the end, the dynamic pricing benefits the consumers because, without it, they wouldn’t be able to book a taxi in demand spikes. However, they inevitably feel displeased when charged an unexpectedly surged fare.” He agreed that the demand index might relieve it and improve user experience by setting the right expectations.

However, this feature can have only a little impact on people’s perception, thinks Nikolay Kodolov, chairman of Moscow taxi drivers’ labor union Dobro: “In taxis, the lion share of revenues come from frequent riders. Such users are well-informed and emotionally prepared for volatility of prices.”

Shapochkin said that the demand index doesn't address the core concerns. “First and foremost, the antitrust authority should make the pricing algorithms of ride-hailing companies transparent so that taxi companies and consumers could calculate it.” He thinks that the antitrust authorities should also force the company to enhance its pricing algorithm: “The real problem is a lack of the minimum fare limit. A taxi driver can drive for a quarter hour to only drop the customer a few doors down the street for a $2 fee.”

Higher tariff to premium mobiles?

Ironically, the complexity of the algorithm inspires consumer myths which, in turn, harm the providers’ public image. For instance, trip price’s link with the price of user’s mobile phone is an example of such a myth created by amateur testers, thinks Yura Nikolaev, publisher of Truesharing.ru: “Yandex's press service always stresses that it's dynamic pricing is based on more than a hundred factors. It is possible while not confirmed that the mobile device model and operating system is among them. However, it doesn't correlate directly with a trip fare.”

On the contrary, direct correlation exists between the demand and offer of free taxis in a certain area. By overlooking it, the testers fall into a common pitfall, he said: “When you book a taxi from a mobile, the system registers a basic level of demand. Then you repeat it on another device making the algorithm believe there's an increased demand in the vicinity and it raises the tariff in the second trip order. I don't think Yandex is so short-sighted as to give much weight to the price of user’s smartphone because, in too many instances, it has nothing to do with willingness to pay more for taxi trips.”

At the time of writing, the Russian taxi market is changing its shape under the Western sanctions. Uber said it would accelerate sale of its stake in a joint venture with Yandex. A few days later, local media reported that Yandex’s first runner-up Citimobil will close shortly. Thus, the tech giant will enjoy a market share larger than ever before. Presumably, the pressure on the company will increase as well. “Yandex denies its market power but it’s just obvious,” said Shapochkin.