Is surge pricing by Ola / Uber, equivalent to exploitation?

Here’s the most comprehensive and crisp analysis of this issue that you need to read.

Before we get into the exploitation debate, let’s make sure we clearly understand why taxi fares are government regulated in the first place (in almost all major cities across the globe).

Fares for intra-city (i.e. within a city) public transportation services are typically regulated (auto, taxi, buses, local trains, metros etc.) and not market driven (irrespective of whether they are run by government or by the private sector). Market driven pricing, when applicable to transportation, is usually left for inter-city transport (i.e. travel from one city to another – which is typically planned in advance compared to intra-city), as can be seen in airplane fares and even train-fares in many countries. The rationale behind a government controlled intra-city transportation pricing is that, this is something that a resident needs to undertake on a daily basis, and usually without advance planning, and therefore lack of predictable fare leads to chaos. When demand to move from point A to B in a city is high in a location and the supply is low, and the fare is market driven, those willing to spend more money will have an undue advantage over those who can’t. From society’s perspective that’s unfair – ability to use public transportation, in cases of high demand and less supply – should be on a first come, first serve basis (this is the reason most of us view queues at bus stops, and even those for taxis at pre-paid counters in airports, as a fair game).

POV 1: YES SURGE PRICING IS CLEAR EXPLOITATION!

  • Surge pricing is demand supply driven – company’s internal algorithms calculate (an unpredictable) surge multiplier every few minutes. The algorithm cannot be audited (for fairness check) because it is not available to public or government. Thus, when Uber or Ola start charging 3 or 4 or even upto 8 times their regular fare (and sometimes in not so sure peak hours) the exploitation is evident. The feeling is not just in India, but almost across the world.

  • This Washington Post article reveals how surge pricing logic DOES NOT always work the way Uber claims (the video above) – that is, drivers do not necessarily rush to an area of surge on a frequent basis. To quote one observation “it appears that rather than getting more drivers on the road in the short-term, Uber’s surge pricing instead depletes drivers in adjacent areas. A price hike in one area means drivers move there, but away from another, leaving it underserved. If someone in the newly underserved area now needs a car they wait longer, or perhaps a surge price has to come into effect to get a car over there”. By the way, there are so many more studies that conclude the same.
  • Last year in Los Angeles, a Uber driver made a Youtube video (now offline) that showed how to artificially push the surge pricing – you can read this report. So the system is clearly flawed and we cannot trust Uber or Ola.
  • It is unfair to have the regular taxis and auto’s fare regulated – while letting Ola / Uber charge whatever they wish to!

Kerala has already issued a cap of 2X on surge-pricing and after Delhi CM’s labeling of this feature as exploitation (on social media and otherwise) – Ola and Uber have disabled it in Delhi – at least for the time being (leading to a reported lack of availability of cabs by the way, because of the excessive demand during the ongoing second phase of the odd even scheme).

POV 2: SURGE PRICING IS JUST GOOD ECONOMICS – NOT EXPLOITATION!

  • Just because fares for intra-city transportation have been traditionally government regulated, does not mean it’s justified for taxis as well – especially when there are alternative modes of transportation available (in the context of present age). These rules were made when mobile phones were not invented and internet didn’t exist and so there was no practical way of dynamically deducing the market driven price of a ride, which is happening now. It is understandable why dynamic pricing cannot make sense if people have to get into a queue to board a vehicle (one will after all need to know the fare before one needs to join the queue) but when the booking is app driven and the exact revised fare is available before booking – how is that not fair?
  • A lot of anti Uber articles attacking the company for breaking laws of regulation – don’t distinguish between “fare regulation” and “other regulations” (like those regarding driver background check). So while other regulations are necessary and welcome, there is no convincing argument anywhere about the need for fare regulation. (here’s another anti Uber article, with same issue in it’s approach)
  • Uber or Ola don’t force anyone to book their cabs. They show the surge multiplier before you book. Find their price high? No problem, wait for a while to see if price goes down or just go ahead and take a bus or an auto or a local train, or a regular taxi or anything else that government provides. Why blame Uber or Ola? Just imagine the world that existed before they made life easy and live that world. Use them only when you are okay with their pricing, na? They don’t have monopoly in public transportation anyway – so why the fuss? Where is the exploitation?
  • Going by Uber’s algorithm, without surge pricing, cabs will simply not be available at certain times in certain areas. Now is that what we really want? Between the option of not having a cab available and a cab available but at a premium price, which one would you prefer? You might want to read this interesting Wall Street Journal post (from 2012) on the issues with regulated taxi fares in Mumbai, before Ola and Uber made life easier.
  • Princeton University economist Henry Farber’s analysis of Uber’s surge pricing concludes that most of the time it actually does work in the manner Uber portrays it to (that is, surge pricing typically does make cabs available when demand is high or in situations like bad weather).

So now you have both point of views. What do you think then, is surge pricing a form of exploitation or just good economics? Tempted to say, both, eh? 🙂

Feature image source

Post by Amrit Vatsa, online research help by Neha Kirpal

Tags:

Leave a Reply

Your email address will not be published. Required fields are marked *