Is The Indian Government’s Move On Surge Pricing by Uber And Ola Justified?

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To Surge or Not To Surge, is no more a question for the cab aggregators across India. Only last month, the Ministry of Road, Transport, and Highways of India issued guidelines, which now allows surge pricing of up to three times the base fare during the day and up to four times between midnight and 5 am in the morning.

Surge pricing has been in debate and discussion for well over a year now. As the discussions kept brewing, regular commuters tirelessly kept on expressing their disgust regarding the matter. Cab aggregators like Uber and Ola, on the other hand, have consistently justified the fairness of their pricing algorithm. Their claims have always been in line with “ensuring reliability and availability for those who agree to pay a bit more.”

And now we have new guidelines to deal with!

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So, the new guidelines are here. Ola and Uber have already made their point on how justified surge pricing is. Well, is it?

Putting all these aside, it is time to sit up and check if this guideline makes sense. Is it ethical to charge higher than required in the name of ‘reliability’ and ‘availability’? Let’s start with the most basic question.

How does surge pricing work?

Ola and Uber calculate their surge price somewhat like this-

During a surge, the price gets calculated as per a multiplier to the standard rates. The degree of the multiple, say, for example, 1.8x or 2.3x, is determined by the ratio between the demand for a cab and the supply of drivers at that moment when surge goes into effect. The number of cab-requests which are in excess is offset by the limited number of cabs available in a particular area, which is why the rates are multiplied.

Why Surge, though?

Going by the Surge pricing mechanism implemented by Ola and Uber, the strategy allows for a raise in the price when demand for cabs is higher. The price comes down when the demand is low or back to normal.

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This essentially has a two-fold implication:

  1. It ensures that more cabs will ply the roads during the surge, thereby meeting the increased demand.
  2. The dynamic nature of this pricing model ensures that people who really need a ride will get one.

Seems fair enough! Especially because Uber also assures its customers that the Surge phase lasts only a few minutes, depending on how quickly the demand-supply gap can be closed. But does that justify a surge price as high as four times the normal rate? It seems more like setting up real-time examples for phrases like “daylight robbery” and “being ripped off”. Honestly, no amount of rationale can make the commuters think they paid less (pun intended)!

The new guidelines issued by the Centre permit state governments to regulate these cab aggregators running their services in their respective states. The guidelines also suggest that the state continues to regulate prices charged by smaller cabs. The obvious takeaway is- Both Ola and Uber stand to gain much from the new guidelines. It is but normal that they are now looking to expand their business scope by adding more premium services.

All of it again boils down to the original question- Is surge pricing necessary?

The debate on whether surge pricing is a reasonable strategy or not is never-ending. While it is tough to understand who gains more out of this, it seems like surge pricing does encourage more cab drivers to be on the road. Surge pricing is also one of the major reasons why regular passengers get to avail rides at much lower base fares during the non-peak hours.

The new guidelines have come as a big blow to passengers across the nation. The liberty to vary prices as and when the cab aggregators deem fit, does not give a good feeling to the commuters. The commuters are always in suspense regarding the price. They just don’t know how much more they will have to pay each time they book a cab during the peak hours.

You see, it is not all that comforting to look back at the London Tube strike, wherein Uber has been accused of “cashing in on the people’s misery” by charging almost over five times the normal rate. With a centre-backed move like this that now legalizes the entire surge pricing strategy, regular commuters are more like- “Is the joke on me?

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