On this Surge Pricing Business

For what it’s worth, here’s my take on this surge-pricing debate that has occupied my Facebook and Twitter feeds in the last few days. Please note though I work on urbanisation, transport issues are not my area of specialisation, so there are probably things I’m missing out.

Anyway…

Over the last few days, my internet feeds have erupted with debates on surge pricing. The trigger for this was the Delhi government’s decision to regulate cab aggregator companies like Uber and Ola, particularly by cracking down on surge pricing. The Karnataka government followed suit, claiming that it was looking into options to restrict surge pricing by cab aggregators.

For those not aware of what surge pricing is, it entails cab aggregators charging higher rates to employ their cabs during certain times of the day. The argument they make is that higher rates incentivise more cab drivers to participate in the market during lean hours or peak traffic. Since the news of regulation popped out, my Facebook and Twitter feeds are filled with arguments and counter-arguments on whether surge price regulation is a good thing.

Personally, I don’t see a major problem with the idea of surge pricing itself – I get that increasing monetary incentives to stimulate supply can often work. Perhaps there’ll be some stickiness in supply, but it’s not inherently a bad approach.

However, you can’t claim a right to increase fares without increasing transparency. The underlying argument is informed choice – customers need to know what’s driving the surge in prices and whether it’s justified. Without such information, they won’t be able to do what neoclassical economic models expect them to do – communicate demand by exercising (or not exercising) their choice to purchase a service.

For example, I don’t mind paying more if I know that my driver has just travelled a long distance through terrible traffic to reach me in a remote location where there are no other cabs. Neither do I mind paying more if I’m catching a cab at night, at a place where it’s difficult to access transportation. But “more” is a vague term – exactly how much I’m willing to pay depends on the exact circumstances I’m in and what I know about those circumstances.

Here’s the thing – at the moment I don’t know much. Firstly, I don’t know if the extra money I pay ends up in the driver’s pocket. More importantly, I have no clue what factors drive the algorithms which calculate and impose surge rates. For instance, what drives surge prices in the middle of the afternoon in a busy neighbourhood? Is there an actual lack of supply, are drivers dropping out or is Uber/Ola using surge rates to cross-subsidise lean revenue periods? Or are they just trying to make a profit? I don’t know. Therefore, I can’t decide if the surge price makes sense or not.

These information asymmetries exist in every market. However, asymmetries are often structural – ten years ago, when an auto driver charged me over the meter, there was no system or structure in the market that would allow me to check if his excess price was justified. The only thing I could rely on was my own experience.

What’s happening in the cab aggregator market is also a structural asymmetry – the privatised nature of the market allows most information, including algorithms and data, to be proprietary and therefore enclosed. The difference however, is that there are other market models which can be employed. These models however do not provide incentives for cab aggregators like Uber and Ola. Therefore, they’ll prefer sticking to a relatively opaque system where they benefit.

For example, instead of regulating prices, the government can declare that all data on public transport should be open-access. This will pretty much kill the Uber/Ola business models (and we should think carefully about whether we want that scenario), but it will allow more developers to build aggregator apps that can link customer to driver, without incurring the cost of engaging and negotiating with drivers to participate. For their part, drivers have an incentive to invest in infrastructure that can put them on the map, since participation gets them access to customers. There are problems with this model of course – safety, for instance, may become a bigger issue than usual. Prices needn’t be regulated, but reducing barriers to entry and exit should increase supply, reducing prices.

This is just one example of an alternative model. There are probably others. Personally, I think we should experiment a bit with different models and see what works best for both customers and drivers. I should also point out that in many of these surge pricing debates, there’s little talk of what’s happening on the labour-supply side of the market. We don’t really know much (or at least I haven’t heard much) about what the drivers are going through – what their incentives and disincentives are, what constraints they face, and what works for them. Alternative models must take these things into account.

A point to note – I am making all these arguments using neoclassical economic theories, which have been much derided of late. At the moment, I believe these theories to be sufficient for analysis – as far as I know, private cabs are still pretty much a commodity whose market operates by these models, largely because their customer base behaves by those rules (this is just a guess – I could be wrong). This may change with time, as the market transforms and new categories of participants enter.

Finally, my overall stand on transportation in cities still remains the same – that there is nothing better than building capacity for public transport – buses, trains or metro-rail (especially buses) accompanied by infrastructure that facilitates multiple modes of transit. The surge pricing business is a storm in a teacup – far bigger issues of transit exist in our cities and it’s necessary to keep calling this out.

(I originally wrote this as a Facebook post).

 

 

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