The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Raj Ranjan, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
Recently, Delhi chief Minister, Mr. Arvind Kejriwal issued a notice to online cab aggregators such as Ola and Uber to ban surge pricing. As there is a hue and cry in the industry about it, many opposers have put forward the point that it ignores the basic principles of economics to appease a vocal section of the vote ban. Cancelling or capping surge pricing will not only lead to a disruption in cab services in the city, it is also poised to meddle with livelihoods that are dependent on these transportation services.
The first thing to understand about surge pricing – dynamic pricing being the more technically correct term-of-art – is that it is based on sound economic theory. The basic idea is this: app-based services match demand (“riders”) with supply (“taxis”). Both are variables, depending on external factors such as time of day, location of pick-up and drop-off, as well as traffic conditions. Thus, if high demand exists in one area without matching supplies, Uber’s (and Ola’s) surge/dynamic pricing mechanism ensures greater supply to meet an increase in demand. What apps like Uber (or Ola) do is perform a market-clearing function by doing so dynamically. Incidentally, the economics behind matching is what earned game theorists Alvin Roth and Lloyd Shapley their Economics Nobel in 2012.
Additionally, while this move will surely affect Delhi drivers, it has consequences for drivers operating, and commuters living and working on Delhi’s periphery. Without dynamic pricing, which allows drivers from outside the city to compensate for the long distances, the number of taxi operators coming into the city from these areas would be limited; it would also push existing supplies towards areas where no such laws exist.
In the short run, the collapse of private companies like Uber and Ola will give these unions the opportunity to regain monopolistic tendencies – the same tendencies that gave many taxi and auto operators powers to arbitrarily set prices based on distances, time and moods. In the long run, by clamping down on app-based taxi matching services, Kejriwal’s calculation is to force the public to accept the proposed fare hikes for auto-rickshaws in the event of the odd-even formula becoming permanent. Ultimately, the public will have few options – if Uber or Ola fails – but to rely on the notoriously fickle auto- and taxi-wallahs of Delhi.