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May 09, 2016

Surge Pricing: Innovation Vs. Regulation

The Delhi Government has recently banned taxi app companies like Ola and Uber from adopting "surge pricing" - ie, increasing their standard fares multi-fold in places and times when demand rises (so as to "match demand and supply" and "bring more cars on the road" as they put it). The Karnataka Government has followed suit.

In a Mint Article titled "An economic defence of surge pricing", economist Ananya Kotia argues why surge pricing should be allowed. Extracts (emphasis mine):
In the short run, a ban on surge pricing acts as a disincentive for drivers to come on the roads, especially when it is relatively costlier for them, such as at night or early in the morning. Similar logic may discourage drivers to weather heavy traffic and a high time cost that is required to reach a busy locality. For example, why would a taxi driver plough through the mess of Delhi’s Hauz Khas Village, if he can earn the same by ferrying passengers from Khan Market?

...The ban may also have undesirable, long-term effects. Consider the large difference between 1x prices of Ola and Uber taxis and fares of standard static-pricing radio taxis in Delhi. Taxi aggregators can sustain such low base rates, partly because they can charge higher in times of high demand. If the ban on surge pricing is permanent, revenue considerations may force the base, 1x rates to rise. Though surge pricing implies costlier taxis in times of peak demand, the counterfactual, in the long run, may result in more expensive taxis for everyone and at all times. 
In an Economic Times article titled "See you later, aggregator", Nandan Nilekani and Viral Shah (Founding Partner at Julia Computing) provide a "more balanced" view including pointing out how India - which does not allow any car owner to become  an Uber driver - is hardly the "perfect market" that economist:
Both the Government and taxi companies app companies are equally to blame. There are neither sector specific regulators (SEBI, TRAI, RBI) nor domain experts in state departments for sectors like urban transport.  While taxi app companies have been "unable to explain the economic rationale of surge pricing to the users and to the regulators" as even (some) customers supported the ban on surge pricing. There was a need for "transparency in the surge pricing algorithms, and perhaps a cap on surge, would go a long way to convincing everyone that they’re not gouging".
...Surge pricing is workable in a true sharing economy, where anyone with a taxi app can use his personal car and become a driver. In India only licensed yellow-plated vehicles can be used as taxis, and these are driven by professional drivers. At best, surge pricing can bring taxis from neighbouring locations when demand shoots up.
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