See You Later, Ag­gre­ga­tor

The surge pric­ing ban shows our reg­u­la­tors must mod­ernise and app com­pa­nies be trans­par­ent

The Economic Times - - The Edit Page - Nan­dan Nilekani & Vi­ral Shah

In a re­cent In­stavaani poll pub­lished by Mint, over two-thirds of the peo­ple polled in met­ros sup­ported the ban on surge pric­ing. Fur­ther, the poll sug­gests that peo­ple sup­port far more reg­u­la­tion of taxi fares. Delhi chief min­is­ter Arvind Ke­jri­wal is a per­son who knows his num­bers and his base well. And the poll re­sults seem to con­firm that this is a pop­u­lar de­ci­sion.

We be­lieve that the real story is a lot more nu­anced with im­por­tant take­aways for govern­ment, reg­u­la­tors and the taxi app com­pa­nies.

The eco­nomic ra­tio­nale for surge pric­ing is straight­for­ward. When de­mand for taxis out­strips sup­ply, rais­ing prices will bring more driv­ers on the road, or to the ar­eas with surge pric­ing, and equi­lib­rium is re­stored but at a higher price. As sup­ply of taxis even­tu­ally over­takes de­mand, prices come down. This is no dif­fer­ent, at some level, than pric­ing in many other mar­kets — air­line seats and the stock mar­ket, for ex­am­ple.

The ban has stirred up quite a de­bate. The govern­ment and the politi­cians are say­ing that taxi apps are com­mit­ting “day­light rob­bery” by ar­bi­trar­ily rais­ing prices and ben­e­fit­ing at the com­mon per­son’s ex­pense. The taxi apps say that by finely manag­ing in­cen­tives, they are pro­vid­ing taxis at the right place at the right time.

We wouldn’t be wrong if we said that con­sumers have a love-hate rela- tion­ship with dy­namic pric­ing. No­body likes to pay more. But some­times you are just glad that you have the op­tion and can re­ally get that taxi should you ab­so­lutely need one and don’t mind pay­ing more.

Reg­u­la­tion and in­no­va­tion are fun­da­men­tally op­po­site ideas. Reg­u­la­tion is about sta­bil­ity, whereas in­no­va­tion is about risk. Reg­u­la­tors worry about con­sumer pro­tec­tion. But in­no­va­tors are fu­elled by de­sign­ing prod­ucts that will de­light the same con­sumers and in­crease sup­ply. It is ex­actly these op­pos­ing forces at work that have led to the cur­rent sit­u­a­tion.

Need Surge-ry

If we look at the reg­u­la­tory land­scape in In­dia, uni­formly, sec­tor-spe­cific cen­tral reg­u­la­tors have a much bet­ter track record than state govern­ments as reg­u­la­tors. The Re­serve Bank of In­dia, the Se­cu­ri­ties and Exchange Board of In­dia and the Tele­com Reg­u­la­tory Author­ity of In­dia are all sec­tor-spe­cific cen­tral reg­u­la­tors. They work in a pro­fes­sional man­ner and have of­ten as­serted their in­de­pen­dence from govern­ment.

Thus, wit­ness Trai de­fend­ing net neu­tral­ity in spite of a high-deci­bel cam­paign and lob­by­ing by big busi­ness; RBI cal­i­brat­ing in­no­va­tion in pay­ments from pre­paid in­stru­ments to pay­ment banks and now the Uni­fied Pay­ment In­ter­face (UPI); and Sebi boldly mov­ing to­wards dig­i­tal in­fra­struc­ture to pur­chase mu­tual funds with one touch on a smart­phone.

How­ever, much re­mains to be done in the case of state-level sub­jects such as ur­ban trans­port, A huge part of the chal­lenge comes from the fact that these de­part­ments are not in­de­pen­dent, are staffed by ad­min­is­tra­tors rather than do­main ex­perts and di­rectly an­swer to the politi­cians.

The net neu­tral­ity de­bate went through a series of public con­sul­ta­tio- ns, with writ­ten ar­gu­ments and coun­ter­ar­gu­ments. No such con­sul­ta­tions seem to have hap­pened for surge pric­ing. No views were put for­ward ei­ther by the govern­ment, or by the in­dus­try or by cit­i­zens.

The shar­ing econ­omy is a fast-grow­ing chunk of our econ­omy, which it­self is grow­ing rapidly. In or­der to cre­ate an en­vi­ron­ment that fos­ters in­no­va­tion and growth, we will need high-qual­ity reg­u­la­tory in­sti­tu­tions that are staffed by those who un­der­stand tech­nol­ogy, eco­nom­ics, ecosys­tems, are im­par­tial and work with the high­est lev­els of in­tegrity.

The taxi app com­pa­nies are equally to blame. Surge pric­ing is quite un­pop­u­lar with users. Many blog posts have been writ­ten by driv­ers as well ex­press­ing their dis­sat­is­fac­tion with the al­go­rithms. This is a ma­jor com­mu­ni­ca­tion prob­lem, where these com­pa­nies have been un­able to ex­plain the eco­nomic ra­tio­nale to the users and to the reg­u­la­tors.

Some trans­parency in the surge pric­ing al­go­rithms, and per­haps a cap on surge, would go a long way to con­vinc­ing ev­ery­one that they’re not goug­ing. Surely, there are al­ter­na­tives to surge pric­ing. If the idea is to bring more driv­ers on the road, there could be cus­tomer auc­tions to bid higher, or driv­ers com­ing from far to an area with higher de­mand could be given ad­di­tional com­pen­sa­tion.

It is dif­fi­cult to be­lieve the claims that surge pric­ing puts more taxis on the road with­out real data. This is be­liev­able in a true shar­ing econ­omy, where any­one with a taxi app can use his per­sonal car and be­come a driver. As prices surge, more driv­ers will be in­cen­tivised to be on the roads.

Al­go­rith­mic, Not Cal­cu­lat­ing

How­ever, in In­dia, only li­censed yel­low-plated ve­hi­cles can be used as taxis, and these are driven by pro­fes­sional driv­ers. At best, surge pric­ing can bring taxis from neigh­bour­ing lo­ca­tions when de­mand shoots up.

We need our reg­u­la­tors to catch up with the times, un­der­stand the chang­ing land­scape, and fo­cus on con­sumer pro­tec­tion and mar­ket sta­bil­ity. The com­pet­ing de­mands of con­sumers, taxi app firms, and auto and taxi unions have to be ac­com­mo­dated.

The taxi app com­pa­nies need to try out newer mod­els and be more trans­par­ent about their al­go­rithms and claims. Let us use this op­por­tu­nity to en­cour­age new ideas in ur­ban trans­porta­tion.

Nilekani is for­mer CEO, In­fosys, and Shah is co-in­ven­tor of the pro­gram­ming lan­guage, ‘Ju­lia’

You’re talkin’ to Ke­jri­wal?

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