Skip to main content

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.
Venture Intelligence is India's longest serving provider of data and analysis on Private Company Financials, Transactions (private equity, venture capital and M&A) & their Valuations in India. 

Click Here to Sign Up for the FREE Weekly Edition of the Deal Digest: India's First & Most Exhaustive Transactions Newsletter.

Image source: New Yorker

Popular posts from this blog

VC Interview: Shailendra Singh of Sequoia Capital India

In a recent interview to Venture Intelligence, Shailendra Singh discussed some of the firm’s newer investments in the early stage segment including in the online payments space, the progress at a few existing portfolio companies and the active role the firm is playing in helping its portfolio companies scale and succeed in India and globally. Prior to joining the firm in 2006, Singh was a strategy consultant at Bain & Company in New York and before that, an entrepreneur in the digital media industry.

Venture Intelligence: How does Sequoia go about identifying potential early stage investments in India? Is there anything different you are doing today than, say, a couple of years back?

Shailendra Singh: There is a lot more focus on technology investing and early stage investing. In general, as you might remember a few years ago, we were doing primarily growth investing but in the past 18-odd months, we have had a very strong focus on early stage and that’s continuing. In terms of how…

PE investments in 2018 crosses $33-B to set new all-time high

Big Ticket investments in consumer apps Swiggy & Byju’s dominates year-end activity, even as investments in Core Sectors slow down
Private Equity (PE) investments in India rose to their highest ever figure of $33.1 billion in 2018 (across 720 transactions), according to data from Venture Intelligence (, a research service focused on private company financials, transactions and their valuations. While PE investments have already surpassed the previous high - $24.3 Billion across 734 deals in 2017 - in the first nine months of 2018, the mega investments in Consumer Internet & Mobile startups such as Swiggy and Byjus towards the year-end, helped the 2018 total vault by 36% year-on-year. (Note: These figures include Venture Capital investments, but exclude PE investments in Real Estate.) The year witnessed 81 PE investments worth $100 million or more (accounting for 77% of the total investment value during the period), compared to 47 such transac…

KPMG Tops League Table for Financial Advisor to Private Equity Transactions in H1 2018

The transaction advisory unit of KPMG claimed the top position in the Venture Intelligence League Table for Transaction Advisor to Private Equity deals in the first half of 2018, advising deals worth $1.7 Billion. KPMG acted as the financial advisor to NHAI in the $1.5 Billion investment by Macquarie to operate 9 highway projects under the toll-operate-transfer (TOT) model. Ernst &  Young (which advised the $730 million asset sale by Indiabulls Real Estate to Blackstone) and Kotak (which advised the Vishal Megamart - Partners Group deal) accounted for the second and third spots respectively.
The Venture Intelligence League Tables, the first such initiative exclusively tracking transactions involving India-based companies, are based on value of PE and M&A transactions advised by Transaction and Legal Advisory firms.
Arpwood Capital (which advised the $760 million investment by Temasek in the $2.1 Billion Schneider Electric buyout of L&;T Electrical and Automation business) …