Surge pricing in taxis needs a middle path
You go past a pub and it announces Happy Hours between 4 and 6 pm. You go in and enjoy your usual beer at 50% below the price. You don’t complain, do you? Then why crib about surge pricing in taxis?
As the Arvind Kejriwal-led Delhi government joined Bengaluru’s transport authorities in frowning on app-based taxi rental companies that cash in on peak-hour demand, questions have arisen on whether companies such as taxi operator Ola Cabs or taxi aggregator Uber are exploitative or not. Maharashtra is also considering a proposal to impose ceilings on surge pricing.
No one complained when Ola charged only ` 49 for a kilometre ride or Uber charged ` 80 for 5km. Market economics is about demand and supply, and companies often offer discounts to boost demand and charge premiums when the demand exceeds supply.
When governments stand in the way of demand and supply, they must have sound reasons to do so. In both Delhi and Bengaluru, there is reason to believe that authorities might have jumped the gun to protect the short-term interest of consumers while in reality they may be hurting their long-term good.
Before Ola or Uber happened, taxi and auto-rickshaw rides were not always determined by the meter. In many Indian cities, negotiated prices are more the rule than exception. There was no competition to offer cheaper prices either.
Aggregator companies standardise services with a degree of transparency, and also offer customer support to address consumer complaints. It is difficult to imagine customers complaining to regional transport authorities on specific rides.
As they are competing with each other as brands, aggregators are under pressure to offer better rates. But more important, they are ushering in a platform model under which technology is used to locate demand and match it with supply in a manner that lowers costs whose benefit can be passed on to the consumer.
Protests and action against “dynamic pricing” based on demand results from two perspectives. One is the notion that taxis are public goods and the other that some rides cost too much. The big question: Are we stopping a technological revolution that results in long-term gains, stronger competition and extra convenience on its tracks by a crackdown on surge pricing?
There is, however, a case against “predatory pricing”, which involves cheap pricing that attempts to eliminate competition. It is possible to argue that cheap fares offered by Ola in effect usher in rather than eliminate competition. In the case of Uber, it brings in more supply into the economy by using spare capacities in private taxis. Only after the brands go big and take a dominant market share can they can be seen as indulging in monopolistic pricing, which can be regulated formally by the Competition Commission of India under Indian laws.
Perhaps Indian regulators can set higher price bands within a framework of surge pricing than set ceilings closer to current normal fares so that technology-driven business model innovation is not discouraged, and a middle path found so that premiums do not reach exorbitant levels.