A History of Marketplace Optimization: American Airlines’s Revenue Management, Uber’s Surge Pricing, Fulfillment by Amazon’s Auction
Guillaume Yon (Duke University)
This paper presents a history of marketplace optimization through three empirical cases. First, the invention of revenue management at American Airlines in the early 1980s. Second, various pricing efforts conducted at Uber and Lyft around 2015, including surge pricing, but not only. Lastly, the implementation since 2020 in North America of a market mechanism (auction) for the Fulfillment by Amazon service, Amazon’s third party retail marketplace. The three cases display the same blend of operations research and economics, where pricing and a marketplace are designed for capacity control. Informed by the history of recent economics, and inspired by a sociology of science and technology approach, the paper describes the translation of technologies (algorithms) for tactical, fine-grained, operational decisions on inventory control into pricing mechanisms and whole marketplace engineering. To understand these technologies, the paper draws on 13 extensive interviews with key actors in their implementation. The airline case shows the first example of an electronic marketplace (the Sabre booking system) that uses prices to shape demand in order to tactically manage a flight capacity in real time. Even though, in the ride-sharing case, surge pricing initially followed the same logic (implemented by the same people), operations researchers went one step further. They designed pricing in order to capacity-control the supply side (the drivers) too, across time and space, and maximize the number of rides. The focus was on the reliability of the on-demand service, and its growth, over short term profit. Fulfillment by Amazon provides a concluding case where a capacity management problem (the allocation of scarce and expensive storage space in Amazon’s warehouses to the best performing third party sellers) has been translated into an auction mechanism, a marketplace – but a managed marketplace – that recast the ecommerce company (its website and crucially its distribution network) as a utility for a host of other businesses.