Parking and the Prisoner’s Dilemma: Everyone is Losing

Tweet: Why parking has become a losing game:

Mobile payments for parking is stuck in a prisoner’s dilemma. If you’ve ever studied behavioral science, you’ve probably encountered this famous problem. In this scenario, two criminals have been captured by police. During their interrogations, the police present four possible scenarios to each prisoner, but the two can’t communicate and there’s no way to send messages to their partner in crime (see what I did there?). Each criminal has two options: confess or maintain innocence. But, their jail time depends on the combination of the two partners’ choices. The following graphic illustrates the possible outcomes:

prisonersdilemma-1

In this problem, the option that best serves the interests of the parties collectively is to both maintain innocence. This option only imposes two total years of prison time for the pair. Though maintaining innocence yields the least prison time for both prisoners as a collective unit, the incentives for each individual prisoner to confess are incompatible with this outcome. If Prisoner 1 chooses to confess, Prisoner 2 receives a smaller sentence if he also confesses. Alternatively, if Prisoner 1 maintains his innocence, Prisoner 2 still receives less jail time by confessing. The same outcomes hold true for Prisoner 1. The prisoners’ individual incentives will always lead both of them to confess, which is ultimately worse for the pair, collectively.  Accordingly, they will always serve more prison time than they would have if they acted based on their collective interests rather than their individual interests.

Right now in the mobile payments industry, we’re reenacting the prisoner’s dilemma to disastrous effect. The price per mobile pay transaction has plummeted precipitously due to low-price bids and bids where price is heavily weighted as a selection factor. This system gives each player in the market an individual incentive to price below the level that is necessary to support a healthy and thriving industry. As you can see in the matrix below, in a price-based bid, mobile pay companies always have a better chance of winning a deal by pricing low. As a result, each company prices low in order to win deals, and the industry gravitates towards outcomes in the top left quadrant where prices are unsustainable and competition is fierce.

Prisoner (1)

Though the corrosive price competition for each individual deal arguably benefits the winner through increased market share, pricing below marginal cost is not sustainable for the industry as a whole. Consequently, this short term gain in market share destroys the funding source necessary to implement and support those deals adequately while setting an unsustainable pricing expectation for future deals.

The irony of this situation is that large cities only benefit from these prices in the very short term. In the medium and long term, deteriorating prices are likely to lead to diminished service quality, especially from single-product mobile pay companies.These prices may also force even larger companies in the industry to seek an acquisition or fold entirely, which ultimately will reduce choice and competition in the market and lead to prices rising again to sustainable levels. The last and most damaging consequence of unsustainably low prices is that it discourages investment in innovation and new market entrants. The next advancement in parking experiences will never arrive if prices continue to stifle innovation.

It’s time to make this market rational. Price-based bids are detrimental to both mobile pay companies in the short term and municipalities in the long term. The mobile pay companies can’t collaborate on pricing or else we’ll all find ourselves afoul of antitrust laws and dealing with a much more literal prisoner’s dilemma, so it’s incumbent upon cities to take a long term view of how they purchase mobile pay services in order to ensure that the mobile pay landscape remains consistent and durable. If this persists, the mobile pay providers and the cities will continue to perpetuate a cycle of condemning ourselves to longer and longer prison sentences.