A Contrarian View On Surge Pricing

Delhi government’s ban on surge pricing by Uber and Ola is yet another unfortunate instance of an economically regressive, market-distorting intervention by an elected government in India. More worrying than the ban on surge pricing is the anti-competitive pricing by Uber and Ola during non-surge hours, an issue that will be touched upon later.

Artificial price caps on goods/services galore in India, leading to shortage of supply and availability of the said goods/services only in the black market – at much higher prices. In his book Fault Lines, Raghuram Rajan painfully narrates his memories of India in 1970s, where there was hardly any bread in the open market due to price caps by the government. Thankfully, liberalisation has eased most of these shortages, but the latest decision by the Delhi government shows that bad economics and corporations-are-evil mindset still rule the roost.

The logic behind surge pricing is to allow supply of cabs to meet increased demand. If there are a high number of requests for cabs, surge pricing nudges drivers to quickly reach the region of surge, thereby meeting demand. The algorithm that dictates surge pricing refreshes every few minutes to keep this activity close to real-time. Such pricing is in place for airlines, and now even for ‘premium tatkal’ ticket pricing of Indian Railways.

A paper on the issue of surge pricing by Uber determines that surge pricing is indeed very effective in matching supply with demand. It compares two instances of a large spike in demand for Uber: one where surge pricing was in effect and another where it was suspended due to malfunctioning of the algorithm. In the former instance, everyone who requested a ride got one. In the latter instance, less than 25% did – a clear case of economic inefficiency.

Though still anti-market, the only possibly valid argument against surge pricing could be to put a high upper cap on the multiplier, since economic efficiency (those who are willing to pay for a cab get one) can arguably be achieved even with a lower surge multiplier. It is well known that most users desist from taking rides in case of too high a multiplier, which might well be due to manipulation of the opaque algorithm. A preliminary study into fairness of Uber’s algorithm concludes that it is generally fair (meaning it follows laws of supply-demand), though exceptions exist.

Of course, cab aggregator companies will rightly protest any cap saying it is a reflection of the government’s inability to provide quality public transport, and that it isn’t their job to serve the public sans profits. But, in public interest, price caps exist on prices of medicines, air fares, autos etc. It is indeed fair to call for lifting of all price caps. However, near-perfect market competition, with multiple players absent any collusion, should precede such a radical move - a condition that is impossible to meet. As these new-age cab services expand, governments would have to take a call on whether or not they serve essential public interest, which might call for price caps. This call should involve all stakeholders, unlike the diktat issued by the Delhi government.

Free market apologists tirelessly point out that if surge pricing is unfair, market dynamics will kick Uber and Ola out of business. This is nothing but ideological sophistry. These companies will survive because, driven by the seemingly bottomless pockets of their investors, they indulge in anti-competitive pricing during the greater part of the day, which ensures customers continue to flock to them, in the process unfairly eliminating traditional competitors in the form of kali-peeli taxis and autos, and other competitors such as Meru.

It will indeed be a scary day when these companies come to occupy most of the transport market, and heavy surge pricing becomes the norm rather than the exception. This scenario also negates that most cowardly and snide “don’t-like-don’t-use” advice offered by free market apologists, since there will be hardly anything else left to use.

Anti-competitive pricing is also the reason why Ola and Uber incentivise drivers based on the number of rides in a day. Clearly, the money collected from ultra-cheap rides alone falls far short of what would make the drivers stay loyal to either of these companies.

Healthy pricing would ensure that drivers no more show displeasure towards long-distance passengers. Also, any undue price surges from this base fare would be checked since it would almost certainly ensure riders’ opting for alternative means.

It is contingent upon the India’s competition regulator, Competition Commission of India (CCI), to look into such anti-competitive behaviour and take corrective action. Unfortunately, it has already turned down one such plea.

Another flawed argument put forward in favour of cab aggregator companies is the one against more transparency in surge pricing algorithms. It is indeed unwise to force private companies to reveal all their cards, but voices justifying complete opacity would do well to be reminded of the pre-2008 era, during which investment banks wrecked the global economy through opaque and complex financial instruments. Perhaps the government should lead the way by being more transparent about ‘premium tatkal’.

There is little doubt that cab aggregator companies have been a boon to India’s quality transport-starved public. However, to ensure market sustainability and maximise public welfare, CCI should check anti-competitive behaviour by such companies and any possibility of collusion between them, and governments should ensure quality public transport, besides encouraging stiff competition by allowing more autos and flag-down taxis to ply on the streets.

Hopefully, there will soon be a real-time app-based bidding system for hiring cabs.