[Ola-Uber] Banning Dynamic-Pricing: Valid/populist/political gimmick?

The Usual Suspects - A Chain of Events

  1. Odd-even returns in Delhi from 15th April
  2. Delhi Govt. bans Surge dynamic-pricing used by cab aggregators, calling it a loot (daylight robbery)
  3. The usual social media outpour: first blatant criticism followed by overt defense leading up to historically and geopolitically calculated and analytical criticism and the counter-narratives.

It is a chaos and needs to be systemically analyzed.

What is surge pricing? Why do it?

The app-based services match demand (“riders”) with supply (“taxis”). Both are variables and depend on external factors like location of pick-up and drop-off, time of day, as well as traffic conditions.

Basically, it is a market clearing function(adjustment of supplies to meet the demand) being performed by price adjustments through complex algorithms that companies like Ola and Uber have designed- the “invisible hand of the market” to rule them all.

It’s this dynamic pricing- to be correct, that allows even the service providers to have a fair chance at cost recovery. In layman terminology, it’s the same as auto fare shooting up when it rains like cats and dogs or when he knows there would be no return customers. All these supply-side constraints are substantial to policy making.

So is it all sacrosanct?!

Well, in an ideal market economy- yes the invisible hand of the market would be sacrosanct without any interference allowing supplies to meet demand. But it’s not an ideal world, is it?

One major drawback of the aggregator model is that the drivers are a separate entity and work on a trickle down theory. And we all know how that turned out- the Illustrious failure of 1st and 2nd Five Year Plans. Most of the times, these surged prices are not trickled down to a driver who took the real pain of fulfilling the demand. Although evidence suggests that drivers working with such aggregators earn much higher than otherwise, as always done, the majoritarian data is universalized to say all and this needs to be regulated by the state to protect the interests of drivers.

Also, the surges tend to be outrageous(personal experience of 5 km being charged for 650 INR). This one is easy because the solution is with the airline sector- cap the surge! let the invisible hand be called out if it crosses its limits.

Anything India specific??!!

YES!! This is where it all gets too interesting. It’s India after all!

Prima facie it appears to be a populist move- compulsive urge to satisfy people at the cost of economy, which is not always bad, rather it’s inevitable sometimes when you have promised and threatened the babus to stay in line since you will be in power for the next 10-15 years.

But when you realize that auto and taxi trade unions had been meeting with government officials at the backdrop of this specific issue of cab aggregators eating up their business, it all becomes too suspicious to ignore.

This is the kind of politics that starts to appease trade unions (the larger vote bank) by ruling free market economy with an iron fist, thereby allaying the booming startup industry, putting the economy at risk, which can all fail stupendously. And I hope the government realizes this in time before scaring off the market operators.

Let me know if you can add a dimension to the debate. Any opinion would be appreciated!

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I didn’t understand this statement. Are you saying people on social media are first criticising the move by Delhi govt? then defending the move?

Oh no! That’s a generic response/reaction these days. People of various ideologies start to counter a policy, good or bad, blatantly and then the reaction/defense begins and this is when both/all sides begin to make better moves. If it helps, it’s a very generic response to any change organic or inorganic. The entire narrative and counter-narrative that’s created are a satire by themselves.

Hope that clears things if had been cloudy. Let me know.

I agree with you on your observation how social media reacts to some events. However, I feel in this case to the contrary I see people immediately welcoming the ban on such surge pricing.

In my opinion, it is a good move, regardless of what political mileage parties get by it in different regions. Surge pricing as it is as applied by these radio cabs have no regulations in place. While I agree with your point on the fairness of such business practices based on demand - supply and such, I don’t think the market or the regulatory agencies are yet ready for such a practice to be adopted.

How as a consumer do I know the charges are ethical and actually being estimated by an impartial algorithm doing the math? It is impossible to say that. As companies have the incentive to charge you more than what’s necessary if they see an opportunity, there must be regulation on this whole surge pricing model.

Like you suggested, there must be a cap. And there must also be ways for the regulatory agencies to do audits on the charges at any given instance to make sure such a pricing is fair. And it is easy to do as these companies are heavily data centric and govt. should be able to access such data by regulation.

Now when you take the case of auto-wallahs, this dynamic pricing has always been there based on weather, traffic and even the mood of the fellow. But it has always been illegal to do that and regular fares and fines are imposed whenever they are reported or caught. So why to let this system of surge pricing take over India only for these big private car companies when auto and taxis have all along been required to run on a standard meter based on time charges.

You have raised some excellent points and concerns. Let me try to address each:

  • First up, as I mentioned earlier, that line was satirical. However, the problem with the objective analysis is any idea, value, opinion will always depend on which band of spectrum one stands on and the problem of value neutrality is acknowledged by any rationalist. In this particular case many of my friends in the startup business, not just in urban transport, have raised the red flag on this exception becoming a practice. So there is that. In the sense of satire, I will leave this point open.

  • You are right to say that a good move is commendable, regardless of any political gain it might garner. However, a more rational solution would have been capping as we have agreed, in the spirit of the free market, because one also needs to look at the supplier’s constraints. And I agree the regulation needs to be an empowered one to tackle these contemporary concerns.

  • While the concern about algorithms would be valid for new startups and need to be regulated, companies like Uber and Ola have earned the reputation, not by bogus/illegitimate algorithms, but a trustworthy one, though needs to be capped as the economy doesn’t work strictly by economics right?

It is here, we need to remind ourselves why did these services even gain enormous merit? It was partly the failure of public transport that surged the demands. This was a dimension even I forgot to add.

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@thedarkwoods Good post and questions. I am very much in agreement with you that free market economics should be allowed by the government rather than follow populist moves.

Can you explain the above in simple terms. Looks like theory to me :open_mouth:

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