Why States Should Not Curb "Surge Pricing" By The Likes of Ola and Uber

The typical bureaucratic approach to a technology or an issue that they don’t quite understand is to play safe – or populist. And in Indian babudom, playing safe often means banning a new idea. Thus, the Telecom Regulatory Authority of India banned Facebook’s Free Basics, and what people got free earlier will now have to be paid for; in Karnataka, there is now a proposal to ban “surge pricing” by tech-based cab aggregators such as Uber and Ola. “Surge” pricing is about paying a multiple of the normal fare when demand for cabs is high.

Let’s be clear. No commuter likes paying surge fares, but this is what ensures you get a cab during peak hours. If you want a cab when too many people want it, you pay more. This is the logic of dynamic pricing in airlines, where the early bird gets cheap tickets and the last few seats go for a bomb; this is also why telecom companies pay high prices for spectrum in some high-demand bandwidths. They may crib, but if demand is more than supply by a huge multiple, “surge” pricing is the only way to go.

According to a report in The Economic Times, the draft regulations for such cab services – called The Karnataka On-Demand Transportation Technology Aggregators Rules 2016 – have these words: “the fare, including any other charges, if any, shall not be higher than the fare fixed by the government from time to time.”

The draft also proposes that such cab services will need licensing.

On the plus side, it does make sense that aggregators should take some responsibility for the cabs they bring under their umbrella. They cannot claim they are only about the technology, and not the underlying services they enable. They are the ones signing up drivers, not some satellite in the sky. Some regulation is not unwarranted.

However, every regulation must use the light touch where the idea should be to ensure accountability for what is being sold to consumers, without hamstringing the basic business proposition or unique selling proposition.

The truth is “surge” pricing already exists for normal taxicabs and autorickshaws, where prices are higher in the late hours. Moreover, in the absence of effective policing, actual charges demanded by auto drivers is often much higher than the stipulated fare.

One can view this as extortion or just an illegal way of demanding “surge” pricing by the ordinary autorickshaw driver. They know when they can demand higher prices, and when they can’t.

But even the currently “regulated” services take unwary customers for a ride – a longer ride – or charge them fares they know nothing about. This kind of extortion is less common among the aggregator services, since they often follow GPS-based maps to find the shortest route from Point A to Point B. The fares are often deducted from e-wallets. This ensures that you are not robbed of that little bit of coinage due to you from your regular autorickshaw-wallah because he does not have enough change.

“Surge” pricing is the premium you pay for certainty about finding a cab. It is not worth tinkering with this market mechanism in the name of “levelling the field” for incumbent taxi and auto drivers. It was their monopoly and ability to fleece customers that the aggregators have broken – and the consumer is, by and large, happy with this state of affairs.

Also, what kind of regulation are we talking about when, despite the big fall in fuel prices, regulators have not cut cab or auto fares? The only thing worth doing about “surge pricing” is to ask aggregators to make their policies on “surge” transparent. Messing with market mechanisms is foolish.