Are we being unfair to auto drivers if we support surge pricing?

Pavan Srinath April 20, 2016

Is an auto driver asking for extra fare any different from Uber or Ola’s surge pricing?

I have been having these arguments on Facebook and Twitter, and the TL;DR answer to that is: Yes, it is very different.
On-demand transport is when you have the freedom to walk up to a road and flag down a cab or an autorickshaw. Or when you have the freedom to book a cab at a minute’s notice on Ola or Uber. This is fundamentally different from transport that you arrange well in advance.

Metering was the least-worst option to manage on-demand transport services a while ago, when the technology was no better. Surge-based dynamic pricing is a better solution to the on-demand transport problem, which is possible thanks to today’s technology. Yes, an auto driver bargaining for extra fare is also a little like surge-pricing, but it is far less efficient, and it doesn’t improve overall connectivity outcomes much.

It is necessary to have robust competition and low entry barriers to make the surge-based dynamic pricing work well for the public good. And this is best done by liberalising the regulations.

A few things to think about:

  • Not all auto rides cost the same. Opportunity cost of each auto ride is different. A ride that will beget a second ride within 5 minutes of reaching the destination has a low opportunity cost, and one that makes you travel back empty has a higher opportunity cost.
  • Metering the auto to a fixed fare was an old, less efficient solution to this problem. Where profits and incentives make sense “on average” but not at the margin – where an auto driver is thinking of taking the next ride or not.
  • Further, the auto guy had no clue where demand was peaking dynamically, so auto use was inefficient as he had to lie idle a lot of the time, even when there was demand.
  • What would happen informally (and technically, illegally) is a negotiation for a higher rate. Problem is, the effort involved in the negotiation is also an expense, a drain on people. Plus, it felt very arbitrary. It happened in circumstances where the auto drivers changed their demand from you after you got into the auto, etc etc. So it was an informal, uncoordinated, individually negotiated “surge” price, which had poor informational and signalling value.
  • Let’s not even get into faulty meters, lack of contestability, lack of a feedback mechanism and more.
    The Uber/Ola cab aggregator model takes this informal price negotiation, and instead of having an acrimonious negotiation between the customer and the driver, the platform provides the “negotiated” price. It does so by:

1. Ensuring that you know that there is a surge in action.
2. If the surge is in play, it makes you double-confirm that you want to ride anyway.
3. There is an option to get notified when the surge drops.
4. Users can try other travel options (different car/service etc) to see what works best for them.
5. Users can also make their own trade-off on the cost of delay vs. extra cost of surge pricing depending on what they value more.

But yes, the ‘negotiated surge price’ is opaque. And made using a proprietary algorithm. Yes, cab aggregators could cheat. Yes, they could potentially cartelise. Yes, they could potentially hold people to ransom. I have no clue what kind of transparency anyone can mandate around this. I’m sure the algorithm goofs up sometimes too, and one can hope it gets fine-tuned fairly regularly.

The only way I can imagine we can prevent collusion/cartelisation/monopolistic rent-seeking is by promoting competition.

Let’s remember, Uber + Ola still are a tiny share of the transport in the city. And they are going to compete with newer forms of on-demand transport, like bike shares, carpooling options, ZipGo-style shared buses, full-on private bus services and others.

The competition for on-demand urban transport services can be good if the regulatory barriers to entry are low (and currently they are sky high!) and if the Competition Commission of India works to dismantle collusion and monopoly when there is strong evidence of it occurring.

Cab aggregators are among the biggest changes disrupting the urban transport sector in India in over a decade. Let’s not kill the disruption with blunt regulation just yet.

Pavan Srinath is the head of strategy and programmes, and a Fellow at the Centre for Smart City Governance, at the Takshashila Institution.

Lead image: Pavan Srinath