Wired Magazine reports that San Francisco is planning to adjust parking spot prices based on demand, essentially moving to dynamic pricing of parking spots. Note that SF has been experimenting with the dynamic pricing of spots already. This proposal by San Francisco Municipal Transportation Agency (SFMTA) — which has not been voted by the City Council yet — expands the dynamic pricing spots from the current 7000 meters to 28,000 meters.
I’ll make 4 salient points about the issue: (a) Success depends on operational transparency, (b) Roads utilization, not spots, is the main source of congestion, (c) Dynamic pricing may not improve utilization, and (d) Dynamic pricing may hurt consumer welfare. (In fact, I will discuss research evidence that SFPark dynamic pricing can hurt consumer welfare).
1. The success of Dynamic Pricing depends on Norms and Operational Transparency.
Based on much of the research in Operations, I argue that the success of dynamic pricing implementation hinges on concerns about fairness and equity as much as on generating economic value. Two factors that influence the success of a dynamic pricing policy are evolving societal norms and effective communication of the policy.
Simply, the society has to be accepting of the policy and the policy implementation has to have operational transparency1. These are the two crutches that a good Revenue Management policy depends on. Ride-share companies such as Uber and Lyft, have changed the societal norms on what’s acceptable in surge or variable pricing.
But, how to be operationally transparent? This is challenging in both conceptualization and execution. How to signal that a 3X surge price is fair? Sometimes, the argument is straightforward. For example, everyone expects to have a hard time parking on Friday night. What about a rainy Wednesday night? What about near a hospital? It is in such cases, operational transparency helps with restoring customer goodwill.
I can see that SFMTA is already engaging in efforts to make the policies transparent, but it is unclear how effective this communication would be…
The agency will give plenty of warning of pricing changes, and prices will only fluctuate by 25 cents each month, tops. There will also be a meter ceiling and floor: You won’t pay less than 50 cents an hour, or more than $8.
2. Road Utilization, not Inefficient Parking Price, is the main source of congestion.
To think about the congestion issue — one has to consider the basic difference in choice for parking vs. driving. A traveler can choose to take the Caltrain/public transport/cab/rideshare/drive or ask a friend or avoid freeways if travel is expensive. However, once you get to a destination in your vehicle, you have to park. So it is arguably better to test out congestion pricing on roads than to test dynamic pricing of street parking.
To add to this, different roads have variability in utilization over time, which in fact allows for dynamic pricing to be more amenable for implementation.
3. Dynamically Priced Meters may not improve Utilization (or Welfare).
I would estimate that SF parking spaces are already highly utilized on average. For a highly utilized asset, dynamic pricing is effectively another method of rationing the asset. I would argue that dynamic pricing of meters, only shifts customers who use the parking spots (while generating revenues, of course!) However, dynamic pricing doesn’t solve the congestion issue per se.
To visualize this issue, think of a doctor who is highly utilized. She sees a large panel of patients with the same illness (for simplicity and comparison to congestion policies). Patients have long waits since the doctor just doesn’t have enough hours to see all patients.
– Equity argument would suggest seeing as many patients in the time available. This is still rationing, because many won’t be served. So how should we decide who gets the service? Perhaps first come first served. (Researchers call this policy as “FCFS discipline” in Queuing Theory). A policy that implements a discipline like FCFS still rations.2
– Dynamic pricing argument would imply that the physician is able to see patients with a higher willingness to pay (WTP), maybe seeing each of them over a longer interaction time. Such a policy means that the doctor sees fewer people for longer visits, and/or sees people who paid more earlier.
In both cases, the doctor’s utilization could remain nearly the same, it is only the composition of patients has changed.
4. SF Parking Dynamic Pricing has to be “simple” to improve Consumer Welfare.
A recent, and very cool research paper by Feldman, Li, and Tsai (2017), “Welfare Implications of Congestion Pricing: Evidence from SF Park” looks at the pilot implemented by SFMTA at 6000 parking spots between the years 2011-13. (Pnina Feldman and Jun Li are alums from our Wharton OID Operations Doctoral Progam).
They find that congestion pricing leads to higher social welfare compared to a policy that imposes time limits on parking. However, the effect on consumer welfare can be ambiguous. So, where is welfare lost?
First, the paper shows, as I argued above, that the primary concern is not to redistribute the composition of demand, but better utilization. This may not occur in areas with moderate utilization if drivers drive out of (or don’t drive to) those regions seeking better prices.
Then, there is a cost of complexity (related to transparency argument). If the pricing structure gets very complex, congestion pricing may actually lead to more search traffic, not less. Therefore, a simpler policy may achieve higher welfare than a complex one.
Why?
Feldman et al find that an increased level of price dispersion causes more people to search for spots with better pricing. This searching occurs when there are empty spots, that have at high prices. In fact, rationally speaking, drivers are more likely to think more spots may be available if they see empty spots. Such searches for lower pricing spots might even exceed the congestion created due to the search for better spots under static pricing.
This is a cool paper that demonstrates the complex effects of dynamic pricing efforts on the consumer.
Notes:
- Operational Transparency is an emerging area in Operations Management research literature. See some service operations research by Ryan Buell at Harvard.
- The first-come-first-served process seems like a “fair” policy. But, such a policy has a lot of inefficiencies. If patients have different ailments, the FCFS policy will be very poor. In fact, even if the tasks are comparable, there can still be fairness issues with FCFS. For example, would it be acceptable if early job applicants have a better chance of getting a job than applicants who came in later (assuming everyone applied before the application deadline)?
- Pnina Feldman, Jun Li, Hsin-Tien Tsai, 2017, Welfare Implications of Congestion Pricing: Evidence from SF Park. Michigan Ross Working Paper.