Ola, Uber Surge Price Ban: Kejriwal May Be Fighting For the Wrong Underdog

Banning surge pricing is daft. Delhi Chief Minister Arvind Kejriwal, true to his shoot-first-and-then-ask-questions approach to issues, has banned app-based taxi services like Ola and Uber from charging a multiple of normal fares when demand is high. He should have asked them questions first.

Ola and Uber say surge pricing allows them to increase the supply of taxis when customers demand more cabs. So, prima facie, the idea of banning surge pricing is silly for the simple reason that it interferes with functioning market mechanisms.

Arvind Kejriwal may not mind messing with the market to retain his title as messiah of the underdog. And it can be presumed that other politicians in other states too may join the bandwagon.

The questions Kejriwal should be asking are two: one, who is the underdog here, the taxiwallah (or autowallah) who feels threatened by the shift in consumer preference to Ola and Uber, or the harried consumer? Depending on who is your choice of underdog, you answers can vary.

The second question should be to Uber and Ola: is surge pricing about gouging the customer opportunistically when demand is high, or about genuinely ensuring higher supplies? If it is the former, existing kaali-peelis and auto drivers already do that – gouging customers, that is. Try getting autos to ply for normal fares when you come out of a theatre; or when you want to get to a place where they may or may not get a fare back. Surge pricing already exists in the taxi and auto market, even though it is informal and illegal.

To go back to the first question, Kejriwal should know that the real underdog to serve is the customer, not the autowallah or taxiwallah. The latter are secondary underdogs. There will always be more customers than autowallahs.

Uber and Ola have – in their own way – expanded opportunities for the second underdog by creating higher incomes from driving an auto or taxi. So this underdog is being served as well. If Kejriwal is fighting for the regular autowallah or taxi driver, he is fighting a losing battle. They are now a vested interest, keen on retaining their earlier monopoly of the road.

But the second question is more important, as Mukul Kesavan argues in this article: why should we presume that taxi supply responds to surge pricing? What is the basis on which surges are effected? What is the ratio in which the technology provider and the taxi driver share the spoils of surge pricing?

These questions have been asked from airlines which offer dynamic pricing, and they need to be asked of Uber and Ola, too.

Another question Uber and Ola need to answer is this: if surge is about bringing more supply, the opposite should also be true – fares should fall below the normal rate when supplies are high. Why does this not happen? Why is there a common floor rate, unless this is deemed the level below which driving anywhere is uneconomical?

Logically, in any free market the normal level should be one where prices can both rise and fall below it. Else, it is a one-way market (up) with a floor price. Or are Ola and Uber deliberately keeping the floor so low as to drive the competition away? In this case, it is predatory pricing, and will not sustain.

But unlike what Kesavan says, “the elephant in the room” is not the mystery pricing formulae of Ola and Uber, but the fact that there is a distinct customer preference for app-based taxi rides. There are clear reasons why this is so, despite the carping about surge pricing.

#1: Fares at the bottom end are below normal taxi rates – with air-conditioning being an additional benefit.

#2: App-based taxis pick you up from where you are; for normal taxis, you have to go where they stand (though call-taxis also exist). Since both services exist, the customer actually has a choice.

#3: Human psychology tells us that when a price is quoted through a mobile screen, it seems more authentic – and often preferable to haggling with an autowallah. Take-it-or-leave-it decisions can be made with greater emotional detachment when you see “3X” on a screen, rather than when your cabbie says “teen sau rupaiah” and pretends he couldn’t care less if you take a ride or not. Customers may hate surge pricing, but they hate autowallah haggling even more.

#4: Many people are put off more by cab refusals than the fare quoted. Ola and Uber normally do no refuse rides, though some drivers have indeed been reported to refuse fares booked by the app. Also, you get to rate drivers, and this presumably ensures good behaviour over time. With normal autowallahs, reporting the matter to the police is no help. You get more heartburn trying to do this.

#5: By allowing fares to be split many ways and by getting cars off the road, Ola and Uber actually help reduce traffic congestion. It may now be more economical to use app-based taxis than to buy a car.

Kejriwal should be asking questions of Uber and Ola, not banning them. They may, in fact, be able to get more cars off the road than his odd-even formula. Who wants to drive long hours when you can be driven by somebody else and also cut your fare in half by sharing it with another cab user?

The only real problem with app-based services is this irony: you can see an Ola in front of you, but the app may not allow you to board. It may even allot a cab some distance away. A cabbie who gets a fare on his own should be able to take the ride autonomously as long as it can be logged into the system.

Kejriwal’s shoot-first-and-then-ask-questions is counter-productive. Maybe Uber and Ola are fleecing customers, but he has to establish that first.