The tyranny of a level playing field

To the extent that regulation creates incentives to divert money to retention, it imposes wasteful costs on society

The impact of minimum price mandates will have exactly the opposite effect in the market. Photo: Hemant Mishra/Mint
The impact of minimum price mandates will have exactly the opposite effect in the market. Photo: Hemant Mishra/Mint

The path to hell is paved with good intentions.”

Chances are transport regulators in Karnataka have never read the aforementioned quote. And if they have, it appears they have not internalized its teachings in their day job. Little else explains their recent proposal to prescribe both a floor and a cap for cab aggregators operating in the state. Not to be left behind in this race to the bottom, neighbouring Maharashtra too is following suit.

These initiatives are in response to protests by two groups—the driver-partners that operate using the cab- aggregator applications to find matching riders, who have recently struck work to demand higher incentives, and the traditional taxi operators who have lately faced the brunt of competition from the cab-aggregation industry. The commissioner, transport and road safety, in Karnataka has been quoted as saying that these minimum price mandates are being implemented “to prevent unfair trade practices by aggregators, in which drivers lose out. If the operators cut prices, drivers are impacted.” Newspaper reports indicate a committee set up by the Karnataka government has recommended that the cab aggregators be mandated to double their respective minimum fares.

In the context of these (admittedly stylized) facts, let’s now analyse if the good intentions of the government will come to fruition. Cab aggregators aggregate riders on one end of the platform and drivers on the other end. They are what economists refer to as “two-sided markets”. In two-sided markets, intermediaries follow pricing strategies that incentivise the more price-sensitive group of consumers to aggregate through discounts, cash-backs and other incentives, and then utilize the (cross-group) network effects to attract people on the other end of the platform (drivers). Thus, the larger the group of consumers, the greater the advantage each additional driver will have when she will link up her cab to the cab aggregator. Two-sided markets are ubiquitous.

Seen in the context of this market structure, the impact of minimum price mandates will have exactly the opposite effect to the one the transport commissioner has in mind. Since minimum price mandates will raise the price higher than the going rate, the most price-sensitive segment among riders using the cab-aggregator app (presumably working-class folks for whom every marginal unit would be more valuable) will prefer alternative means to commute. Ironically, therefore, fewer trips may originate on the cab-aggregator application. Since the driver-partner and the app share revenue, fewer trips will mean less take-home for the driver-partners.

Of course, the intra-city transport market is not completely commoditized and cab aggregators can compete through product differentiation in lieu of price to lock in consumers it has retained (presumably, these are riders for whom such differentiation has value). It is easy to imagine free Wi-Fi and in-cab movie panels being offered in vehicles linked to the aggregators on top of an advertising deluge and cash-back/discounts to consumers; this was the case in the US in the 1970s, when the Civil Aeronautics Board artificially kept aviation prices above equilibrium. Frequent flyers in the US in the 1970s could look forward to flying luxuriously. But it is easy to see the unintended consequences if the industry evolves in this manner. Money expended on advertising, cash-backs/discounts and other assorted luxuries in the absence of the minimum price regulation could be used towards higher driver-partner wages, enhancing safety standards and greater research and development in logistics/algorithm of the cab aggregator. To the extent that the regulation creates incentives to divert the money to retention, it imposes wasteful costs on society.

Some have argued that cab aggregators’ prices are so low that they constitute predatory pricing under the relevant antitrust law. The last word from the Competition Commission of India/Supreme Court is yet to be heard on this, but as we discussed above, very low (or near-cost) prices are in fact socially beneficial in the context of two-sided markets because in the absence of these pricing strategies, the markets and transactions won’t emerge in the first place.

Thus far we have discussed the explicit costs of mandatory minimum price regulation. Consider now the impact of such regulations on, say, a start-up at the Indian Institute of Technology campus that can match riders to drivers without the surge-pricing mechanism. Or to driver-owned cab aggregators that wish to compete with incumbents offering lower fares. For both these groups of emerging competitors, the minimum mandatory price regulation operates as an entry barrier. Thus, to the extent that consumers cannot benefit from their innovation, the incumbents gain at the expense of entrepreneurs, consumers and drivers.

In summary, then, it seems compelling to channel our good motives through the instrument of law/regulation to set right an apparent injustice, as the transport commissioner of Karnataka is no doubt trying to do. But civil society should push back against such honest but harmful impulses. Almost invariably, such impulses are sought by Baptists but end up benefiting the bootleggers.

Mandar Kagade is a policy analyst at the Bharti Institute of Public Policy, Indian School of Business. These are his personal views.

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