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Tag Archives | Surge Pricing

Six Things That Trigger Government Action

While enough has already been written about the ban on surge pricing by taxi-aggregators, this policy measure is an interesting case study to analyse what are the factors that led to the Karnataka and Delhi Governments’ decision to spring to action and respond with such a policy measure. The hypothesis of this article is that there are six things that incite governments to ‘do something’ in a situation. Here is a list of the factors, in no particular order. Neither is the presence of all these factors at the same time essential, nor are the factors mutually exclusive.

  1. Descriptive or vividness bias: Descriptive bias is one of the cognitive biases in evaluation. According to this bias, information that is vivid, descriptive, and visually stimulating has a greater impact of being registered as valid evidence regardless of how close it is to reality. Thus, campaigns and protests that have vivid imagery circulated through media tend to strike a chord with the masses and the government alike. Thanks to social media, such vivid images go viral very quickly and garner a sense of urgency with which the issue in question must be responded to. For instance, in the case of surge pricing, the pictures showing 2.8X, 3X went viral and caught people’s and Mr Kejriwal’s attention.
  1. Need to respond to interest groups: Governments can be coerced into action deliberately or unconsciously by various interest groups, such as labour unions, auto unions, OBCs, etc. More likely than not, the government looks at these interest groups in terms of gaining an electoral advantage. By terming the surge pricing as “daylight robbery” by cab-aggregators, Mr Kejriwal wants to portray this image of the protector of the interests of middle-class, who are the typical user of taxis, while simultaneously endearing himself to the auto-rickshaw drivers, who are purported to be among his staunchest supporters. Another important group is the government itself, which has vested interests in the success of its policies. The reinstatement of the odd-even policy by the Delhi government, led to a scarcity of commuting options for the public. One can surmise that because the government did not want to withdraw its already rolled-out odd-even policy, it reacted with another policy measure to tackle the scarcity.
  1. Sense of violation of fairness: All governments try to maintain the perception that they want fair and equitable outcomes for their people. As soon as there is a sense that fairness is being compromised in favour of one or the other groups, governments decide on actions that restore a sense of fairness. Again, the middle-class was portrayed as being shortchanged in case of surge pricing.
  1. Judicial activism: As per Indian law, an individual, an institution, or a non-governmental organisation (NGO) may approach the courts of justice to file a Public Interest Litigation (PIL) to raise issues of broad public concern and demand social justice. Typically, the litigants use PILs to focus the attention of people and government toward matters related to larger public interest especially in the areas of human rights, consumer welfare, and environment.
  1. Mistrust towards MNCs/private enterprises: More often than not governments treat private enterprises, especially large multi-national corporations, with suspicion. Any perceptible large-scale action on behalf of these enterprises immediately makes the government vigilant and ready to take action. Further antagonism builds up because of the past reputation of an entity, particularly if there has been bad press. This can lead the government to treat every future action by the said entity with caution and exaggerated measures. With a rape case being filed last year against one of the Uber drivers, the cab-aggregators have since been under the government’s scanner.
  1. Government’s urge to regulate: The government finds it difficult to let go of its urge to be in the driving seat and hence it often responds in order to take control of situations that are otherwise best left to market forces. For instance, technological innovation is omnipresent in today’s world and the government is not always nimble enough to respond to the fast pace of technology. As a result, the government reacts by establishing regulations, especially in the short-term, that help them rein in the pace of technology while the government itself thinks of long-term solutions. The government regulates taxis and auto-rickshaws by issuing limited number of licenses to ply. Drivers’ unions also help maintaining the status quo that governments know how to navigate. Taxi aggregators have broken this system, and Uber was also criticized for operating beyond any such oversight world over.

Nidhi Gupta is a Programme Manager at the Takshashila Institution and tweets at @nidhi1902

 

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A Ban on Surge Pricing will Create Shortages

By Anupam Manur (@anupammanur)

Instead of a price ceiling on cab prices, the government should look at all the ways in which it can increase the travel options within the city.

Karnataka’s Transport Minister Ramalinga Reddy recently unveiled a new policy to regulate cab aggregator services such as Uber and Ola. While Karnataka previously had a policy to regulate regular taxis as ride-hailing services under Radio Taxi Scheme, 1988, Uber and Ola were not covered under the law, as they were aggregator services and not companies that own and operate vehicles for hire. However, as the app-based on-demand cab aggregator companies became increasingly popular, the government sought to bring them under the regulatory ambit.

The policy has introduced a few concessions for the cab aggregators, in a move to increase the supply of cabs. They have dropped the restrictions on the age of the vehicles, reduced the number of years that a driver had to be a resident in Karnataka from five to two, and has allowed drivers to switch between the ride hailing apps, as per their choice. They have also halved the license fee and security deposit. All of these moves will benefit the companies and the customers alike.

However, the biggest policy that will have a detrimental effect on the state of urban transport in Bangalore is the decision to disallow surge pricing for these companies. Both Uber and Ola use an algorithm to determine the prices based on real time demand and supply. If the demand for cabs were considerably higher than the supply, then the app would tell the customer that prices have surged. The surge pricing not only reduced demand, but is also a tool to increase the supply. A higher price will automatically incentivise more drivers to go to the area with surge pricing. However, the surge prices can, at times, be quite ridiculous, which is what caught the authorities’ attention. On New Year’s Eve, for example, Uber had a surge pricing of 10X, that is, ten times the normal amount.

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Effectively, the government has put a price ceiling on what these companies can charge the customer. It has given a band with a fixed upper limit, within which the price charged to the customer has to fall. While, this might seem like something to cheer about for the customer at the first glance, a closer inspection will reveal that it will actually end up hurting the customer as well as the companies.

Price ceilings simply do not work, as economic history has repeatedly taught us. A price ceiling will simply create a shortage in the supply of the good in question and create distortions in the market, which will hurt the very customer that such laws are intended to protect. In this case, a ban on surge pricing will lead to a reduction in the number of taxis available in the market, thereby creating welfare loss to the customers who demand the taxis.

The supply of any commodity depends on the price. At each price point, a supplier (driver in this case) will decide whether it is profitable to sell at that price point. Auto rickshaws normally charge 1.5X from 9PM – 6AM, in a bid to be compensated for working late hours and at times that other would not be willing to. Imagine if a similar price cap had been put in place for autos, there wouldn’t be any autos available for hire after 9PM.

Similarly, during peak hours and other times of high demand, in the absence of surge pricing, an Uber driver would not consider it worthwhile to switch on the app or accept ride requests and thus, leading to shortages.

Another major impact of this ruling would be that Bangalore would lose out on the new investment that these companies had pledged. Uber, which has now partnered with 30,000 cabs in the city had planned to expand to about 1,00,000 cabs in the next few years. Uber and Ola combined had pledged to invest around Rs. 15,000 crores in the next few years in Karnataka. With regressive laws such as this, the state could easily lose this investment to neighbouring states. The other worry is that other Indian states could follow this bad example. Maharastra was considering a similar move and it could get buoyed by the Karnataka move.

Finally, the government must rethink whether this is the best method to achieve its objectives. The intention behind this move is to increase the supply of public transport at affordable rates for the consumers. Instead of creating distortions in the market by implementing a price cap, the government should look at other ways to make the market more competitive and remove entry barriers. The government could consider allowing flag down taxis on the streets, like they have in all other major metros in India, which will surely increase the supply of taxis. It could also allow shared autos to ply on Bangalore roads for fixed routes, which will ease the demand for taxis. Another related measure is to allow private busses of all sizes on Bangalore roads, which is currently disallowed. In short, the government should look at all ways to improve public transport in Bangalore and ways to increase the number of options available for customers to travel in the city. This will surely reduce the excess demand for Uber and Ola, which will automatically make surge pricing redundant.

Anupam Manur is a Policy Analyst at the Takshashila Institution.

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Should autos be allowed surge pricing?

If you don’t restrict the market you don’t need to restrict the price.

The Mumbai auto drivers followed their brethren in Paris and New York and went on a one-day strike against the growing number of cab-aggregator services in the city. The strike itself is a testimony to the popularity of these new and innovative means of urban transportation. It shows that people are interested in trying out new options if it helps them save time and money. The resistance from the entrenched players is obvious but what is not obvious is what the government will do about it. The confusion begins right from the start, is this public transport or private transport?

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Source: Flickr

We generally refer to autos and taxis as public transport even if they are privately owned. Perhaps because the government mandates many things that the autos need to do. The color, the fare, the uniform, even the number of autos that can be on the roads is fixed by the government. In fact, the increase in the permit charges from 200 to 10000 is one of the reasons for the strike. But why would a government try to restrict the number of autos (by increasing the price of the permit or not allowing more permits)? If there are more people who want to commute by autos, then shouldn’t there be more autos on the road? The reason generally given is to protect the livelihoods of the auto drivers. Then why are the auto drivers themselves striking against the decision?

The auto drivers in Mumbai are one of the best in the country when it comes to plying by meter. But will they be now tempted to do surge pricing as well? The way to control surge pricing is not by capping it. But by allowing more vehicles and drivers to offer their services. This is beneficial for both drivers as well as passengers. The central government sent out an advisory in July of 2015 and Karnataka State Government has come out with its own policy for regulating the cab-aggregators. Both policies have focused on treating this new phenomenon like traditional auto or a taxi service. Which it is most definitely, not.

Safety should be the chief concern of these regulations. Other operational parameters like prices, hours of service, etc. should not be unnecessarily regulated. Urban public transport is in desperate need of innovation and the government should do all it can to support it. Greater use of such services will result in less vehicles on the road and easing of pressure on the current municipal transport systems. Both would benefit the poor who are dependent on fast and cheap public transport for their everyday needs. Creating a regulatory framework which puts safety and ease of compliance at its heart would be a step in the right direction in this regard.

Siddarth Gore is a Research Scholar at the Takshashila Institution and he tweets @siddhya

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