Story Of The Week

Surge Pricing in India: Daylight robbery or a free-market implication

The debate on the odd-even traffic rationing scheme in Delhi recently shifted from pollution control and congestion to pricing of application-based taxi aggregators (ABTAs) with the Delhi government’s ban on surge pricing in the national capital on 25th April 2016. Earlier this month, the Karnataka government also introduced a ban on surge pricing for Uber, Ola and similar companies. This temporary ban by the Delhi government has been introduced with an attempt to level the playing field for all cab operators. While the government aimed to bring transparency and remove exploitation of users by aggregators, the ban caused an outrage with many Ola and Uber drivers facing several issues.

surge pricing

Private taxis have existed for many years and have been charging “free market” rates based on the category of cars and facilities provided. However, recent months saw a drastic shift towards technology-driven cab operations which have come as a relief for several commuters who find it convenient to book a taxi in one click. They have made public mode of transport more reliable and efficient.

The ABTAs provide several benefits.

  • Increased competition in the market by increasing number of suppliers
  • Allow new entrants as the required software is easy to acquire and entrant does not have to invest in a car fleet
  • Make the supply market more elastic
  • Have improved the service quality leading to low congestion and pollution
  • Charge fares during off-peak hour which are much lower than those of traditional taxi operators or auto rickshaws; etc.

Given the benefits that these ABTAs provide such as huge discounts, free rides, low fares, etc., why has then the Delhi government banned surge pricing mechanism followed by these ABTAs? The aggregates follow surge pricing model which is driven by computer algorithms seeking to create a balance between demand for cabs and supply. When there is an excess demand and a drop in supply, companies raise the price of its offering anywhere from 1.5 to eight times the normal fare which is followed by drivers rushing to pick up customers in the area thus easing the demand and bringing back prices to the normal level.

‘Peak pricing’ is usually triggered during office hours, special events such as a strike or periods of extreme weather, etc. The question that arises is since these cab aggregators and drivers earn more during peak hours, is the supply scarcity artificially created by drivers by turning off their log in during specific hours to create a supply slump and pricing mechanism that jacks up the fares allowing the suppliers to leverage on the increased charge?

The recent ban aims to bring transparency and reform the Indian transportation sector. In the cab-aggregation model, ABTAs neither own the taxis nor employ the drivers. Hence they can’t determine the number of cars plying on a certain day. With the suspension of surge pricing in Delhi, the number of cabs available at a particular time decreased drastically making it difficult for commuters to find cabs on Uber or Ola apps. Commuters complained of no cabs availability throughout the day, long waiting hours, large number of cancellations by drivers, etc.

  • Implications of Ban for drivers of aggregator companies:
    • Apps have raised the income of drivers who now see the ban as an indirect threat to their business and earnings.
    • The even-odd policy has reduced traffic on Delhi roads and boosted earnings of these drivers and ABTAs as the travel time reduces and more people switch to cabs.
    • The number of trips by drivers determines how much money and incentives they get. The ban impacts the jobs of many drivers rendering them jobless.
  • Implications of Ban for Aggregators like Ola and Uber:
    • Surge pricing acts as an incentive for more drivers thereby increasing supply as 80 % of the charge passes on to the drivers while the remaining 20 % remains with ABTAs.
    • ABTAs offer several discounts during off-peak hours, surge pricing allows them to balance their losses incurred during low demand.
    • The ban directly impacts their business of these companies as they will not be able to recover their losses as they may have to charge normal fares even during peak hours.
  • Implications of Ban for Customers:
    • No more charging exorbitant prices during peak hours.
    • Large number of customers are attracted to aggregators due to their cheap prices. However, the same will reduce drastically if ABTAs charge high fares.

Recent Developments and Plans Forward:

Following the ban, Uber temporarily suspended surge-pricing in Delhi-NCR region on 19th April 2016 till 1st May 2016, the day on which ban on diesel cabs was imposed. The Delhi government has threatened all the operators to suspend surge pricing else their permits will be cancelled and huge penalty will be imposed.

The central government is of the view that there should be a cap on surge pricing and it should not exceed 40-50 per cent of the base fare. The cap will bring surety as to what maximum the commuters need to pay. Many drivers feel that surge should be banned, but a complete ban on aggregators will create chaos for both drivers who won’t get work in the short term and users who will have to avail of more expensive rides offered by traditional operators.

A permanent ban by the state government is unlikely. Meanwhile, Delhi Transport Minister has said that the state government would soon be introducing a pricing policy for app-based taxi companies similar to the one in practice for radio cabs. A final policy is yet to be introduced.

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