Home / Opinion / Online-views /  The nuts and bolts of surge pricing and the way forward

The debate on the odd-even traffic rationing scheme in Delhi has shifted from pollution control and congestion to pricing of application-based taxi aggregators (ABTAs). Private taxis have existed for many years and have been charging “free market" rates based on the category of cars and facilities provided. So why this debate on ABTAs now? The reason lies in the scale they have achieved and their vision to be an alternative public transport in metros across the world.

Need for transparent pricing

In the interest of consumers, and understanding the issues involved in the debate, it’s important for ABTAs to come clear on their pricing models and compliance status. The much-advertised 6-7/km fares are not the actual per km charges as most of these firms add per minute and “base fare" charges as well, leading to misinterpretation by the consumers. All put together, the final charges come to approximately 12-13/km. In all fairness, the applications themselves provide good fare estimates and break-up of charges clearly. This coupled with huge incentives to the drivers being paid by ABTAs is a cause of concern for the existing autorickshaws and black and yellow taxis as it is taking away a lot of their monopoly over personal public transport.

Surge pricing: Necessary evil or a free-market phenomenon?

Of late, there is lot of talk about surge pricing. Some say that it should be banned while others say it should be regulated. But like many other debates happening in a grey area where policy is playing catch-up with technology, there is little clarity of the issue at hand, but strong opinions—not always rational and sustainable— get formed.

In simple terms, surge pricing is the increase in prices when demand exceeds supply—the golden rule of economics. So, when in a geographical location, or at a particular time, the number of cabs requested increases, the fare starts increasing above the standard rate by a multiplier—1.1x, 1.5x..., 3x and so on. ABTAs claim this is algorithm-driven and incentivizes more drivers to be on the road to meet the increased demand and in turn make more money when consumers are willing to pay for it. They claim that this also spreads demand during peak hours as many folks wait for the surge pricing to normalize before starting their journey.

As aggregators like Uber and Ola aim to become the alternative to car ownership and existing modes of public transport, they need to maintain a balancing act in keeping the state, society, consumers and drivers in mind. It’s also imperative for policymakers to ensure “predatory pricing techniques" are not deployed by these firms to drive out existing service providers. There was a similar policy stance taken by the central government on e-commerce and online marketplaces.

Case for price control?

The crux of the issue is that while consumers want to enjoy the benefits of cheaper and reliable services of ABTAs, there is a widespread outrage on surge pricing. This presents a strong case for creating price bands, category-wise and also allowing existing taxis and autos to operate within those. This can ensure a level playing field for all operators, transparent pricing for the consumers and even let market economics work. The surge algorithms can be tweaked to meet these requirements. In a market flush with finite venture capital money, it’s important to have sustainable business models in public transport. Price bands may help in furthering that cause also.

Disruption in public transport has become a global phenomenon and is becoming a challenge for policy and regulation. Many cities like Tokyo have regulated the low end of Uber-like offerings to ensure that the primary mode of public transport is their vast Metro network, and that personal taxis are not the solution to mass transit. Cities in India don’t have that level of transport infrastructure yet. Till then, India can be the trendsetter by setting the right policy environment for disruptive companies in a shared economy. A free-to-operate environment which creates more jobs, adds more capacity and merely does not replace one mode of personal transport with another.

Arvind Gupta (@buzzindelhi) is a digital entrepreneur, Eisenhower Fellow for Innovation, and currently heads the Bharatiya Janata Party’s Information and Technology cell. Pranav Obhrai (@pranavobhrai) is working with a consultancy firm and has a keen interest in matters of public policy and governance.

The views expressed are personal.

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