These are exciting times for urban commuters. Transport has traditionally been viewed as the domain of the public sector, but with private sector investments flowing into companies such as Ola and Uber, cities are finally getting newer and better ways to commute. Transport technology companies are offering increased comfort, convenience, reliability and safety. More than $20.6 billion has been invested in such companies since 2010, with around $13 billion invested in 2015 alone. However, several of these companies are at loggerheads with regulatory bodies on several counts, one of which is surge pricing.
So how does surge pricing really work?
Operators claim that surge pricing is activated as a result of high demand from passengers. When there is more demand from one particular area, then surge pricing offers incentives to drivers to flock to that area. This ensures availability of service for passengers at all times.
While surge pricing aims to make supply meet demand, it can also cause market distortion. There is no clear evidence so far which suggests that it directly generates more supply. Perhaps it just reallocates existing supply from other areas, or functions as priority pricing, where the early bird gets the worm. There is of course merit in matching supply and demand in a timely way, but if such a system was indeed more effective, it begs the question why no public transport system has adopted it yet.
A lack of information on how these proprietary algorithms work has created confusion and uncertainty in minds of drivers and commuters alike. In an environment where fares could change at any time, how can a driver make an informed decision about where and when to operate? Are overworked drivers, who drive for 10-12 hours daily, supposed to stay logged in throughout the day for surge pricing to come into play? It leaves several commuters confused too. They wonder whether operators are hoarding drivers and creating an artificial scarcity. What else can explain the active surge pricing when there are other cabs visible in an area?
Surge pricing has been used as an invisible hand in industries like airlines, and this is often the argument for applying it to taxi aggregators. However, for drivers and passengers who use these operators’ services frequently if not daily, uncertainty in pricing causes not only anxiety but also resentment.
Steps ahead for regulators
The debate around banning surge pricing is a healthy sign in a country like India where most of the populace depends heavily on public transport. It is also a golden opportunity for the government to review existing regulations which are withholding current taxi and auto services to serve people better. So what can the government do?
Open trip data
Instead of reacting to anecdotal evidence, the government can raise the level of debate by either asking operators to report anonymised trip information or appointing a third party agency to analyse the data. This data will shed light on what fraction of rides are indeed “surge” rides, how many rides are 1.0×, 1.1×, 2.0×, etc., and what fraction of operator’s revenue is derived from surge rides. Uber currently shares some data points with cities of Boston and New York. This data can help the government make informed decisions for regulating operators as well as improving existing public transport. This is all the more significant for India with the development of Smart Cities.
Cap the multiplier
If operators really do aim to provide service at all times, uncertainty caused by surge pricing does not help business. Capping the multiplier is a must. Accompanied by clear and transparent communication, operators will be able to retain customers and drivers in the long term. The question here remains what is the cap and how will that impact licensed taxi and auto rickshaws. Only further research and pilots can guide this discussion.
Talk about congestion pricing
Public transport has been characterised by poor service for the longest time. The rise of taxi aggregators indicates that consumers are ready to pay more for good service. And the surge pricing debate is all the more relevant as a set of commuters are paying hiked prices for good service. This should act as a wake-up call for city administrators. All transport in cities is currently subsidised and no consumer, including a car owner is paying the whole cost of the service.
Surge pricing is a small portion of a larger discussion around congestion pricing, where all users must pay for negative externalities (pollution, congestion etc.) of their transport choices. Congestion pricing for cities can be a great tool for demand management as it takes into account the whole cost of what users impose upon the system. Unlike surge pricing, congestion pricing regulates demand, making it possible to manage congestion without increasing supply.
What Indian cities need are long term and holistic solutions. Cities must adopt regulatory frameworks as suggested by the City Taxi Scheme to define the role of taxi aggregators in the city. Ola and Uber’s service models look dubiously similar to taxi services and need to be better defined. Commuters need more and better mobility options and it is the government’s job to service all commuters through the existing taxi and auto rickshaw fleets, and taxi aggregators. Public transport needs to be supplemented, and with new models like bike taxis and bus aggregators gaining traction, the government has the opportunity to lead with progressive regulations such that these services do not compete but rather complement public transport.
Zainab Kakal works at the intersection of regulation and entrepreneurship at WRI India Sustainable Cities.