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Surge pricing in taxis needs a middle path

editorials Updated: Apr 20, 2016 14:06 IST
Narayanan Madhavan

Software linked to geographical positioning helps taxis and customers find each other easily

You go past a pub and it announces Happy Hours between 4 and 6 p.m. 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 Rs 49 for a -4-kilometre ride or Uber charged Rs 80 for 5 km. 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.

Read | Odd-even 2.0: Uber, Ola suspend surge pricing after Delhi govt threat

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.

Read | Here is an app to help you against Ola, Uber price surge during odd-even days

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.

In the US, Walt Disney’s Disneyland theme parks introduced demand-based surge pricing this year, raising ticket prices by up to 20% for holiday periods. Customers are finding it useful to avoid peak-time rush. The U.S. Patent and Trademark Office has also issued Uber new patents, including one that helps an “on-demand” system of pricing.

Karnataka, where authorities have even impounded vehicles, has set Rs.19.50 per km as the price ceiling for air-conditioned cabs and Rs.14.50 for ones without air-conditioning. Delhi is yet to announce rules but operators have suspended surge pricing, but the government is already facing a court case filed on behalf of consumers.

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.

In general, too much government control can discourage disruptive innovation by a desirable new technology.

As for taxi companies, they can waive surge pricing for loyal customers. And they should also learn from pubs that offer Happy Hours: A discount always sounds better than a premium!