Playing the Devil’s Advocate on surge-pricing: The arguments against

Transportation is not merely a transaction between customer and service provider, there is a public involved in the matter
Playing the Devil’s Advocate on surge-pricing: The arguments against
Playing the Devil’s Advocate on surge-pricing: The arguments against
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Surge-pricing for taxi aggregators has been widely debated since cab companies in India announced the move earlier this month. This has generated a hot debate about the claims of the companies, the market, consumer choice, consumer rights and workers’ rights. What follows is an argument against surge pricing and for government regulation:

The surge pricing controversy between cab aggregators and state governments took a dramatic turn on April 19, when aggregators Uber and Ola temporarily suspended surge pricing in Delhi after the state government threatened to take action against them for overpricing. In Bangalore, the Karnataka government had reportedly already started taking action against cabs over the weekend.

The argument against these moves, and others being considered by other state governments, primarily comes from a faith in market economics. The Financial Express, for instance, headlined an April 14 article on the issue, “Uber’s surge price justified; it is market economics at work”.

The article makes three primary points: firstly, as long as governments fail to regulate autorickshaws and traditional taxis charging above meter rates, they cannot object to surge pricing. Secondly, since surge pricing is temporary and lasts only as long as excess demand exists, it is a natural correlation of supply and demand.

And finally, since customers are informed in advance when surge pricing is in effect, they are not being overcharged without their knowledge, and have a choice within a transparent system whether to take a taxi or not.

At the heart of the argument for unregulated surge pricing is the claim that the customer continues to have a choice: he or she can clearly see what prices are like and then choose to take a cab or not. And drivers can see how much they earn from the average trip and decide where and when to ply their services. 

However, each of these points needs further exploring. Firstly, the claim that surge pricing is an automatic regulation based on supply and demand is not properly proven. While research on this question is not easily available in the Indian context, examples from other markets show that algorithms for calculating surge pricing are not entirely reactive, but rather are based on aggregators’ predictions of projected demand.

While aggregators would like us to believe that they have only created an online space for a marketplace to function, the truth is that the rules of that marketplace are being mediated by the aggregators. The biggest problem for consumers and regulators alike is that there just isn’t enough transparency about how surge pricing works.

It is this problem of transparency that is hard to get around when what we receive from companies are assurances and media campaigns, rather than clear, comprehensive data. On the issue of driver benefits from surge pricing, for instance, there are claims that the extra profits earned do not transfer completely to the driver.

As for the argument that autos and traditional taxis continue to charge whatever fares they feel like and little action gets taken against them, we should note the difference between the average auto driver and an aggregator. The average auto driver is, in theory, in competition with every other auto driver, and one can hope to beat unreasonable fares by waiting to find an auto driver who is willing to travel at a fair price.

With aggregators, on the other hand, despite claims to be a collection of independent contractors in a marketplace, it is not clear how exactly the rules of competition apply. In the US, this point is now the key focus of an anti-trust lawsuit against Uber, since the petitioner claims that drivers do not directly compete against each other to set prices but follow the ‘price-fixing’ algorithm of the aggregator. That auto drivers and taxis form informal cartels to maintain prices at high levels requires better policing of these cartels, not the creation of another private price-control mechanism.

And finally, there is the question of whether transportation is simply a transaction between customer and service provider, or if there is a public involved in the matter. After all, the government is expected to regulate traffic, maintain roads, reduce pollution and in general make public spaces livable.

And we do want governments to regulate cab services on issues like safety based on “public interest”. To suddenly claim then that pricing is an entirely private matter between aggregator and consumer is somewhat incongruous. 

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