All you wanted to know about surge pricing

ANAND KALYANARAMAN | Updated on January 20, 2018 Published on May 09, 2016


From New York to New Delhi, cab commuters and the powers-that-be have been railing against the ‘surge pricing’ of app-based taxi aggregators such as Uber and Ola.

What is it?

Economics 101 says when demand exceeds supply, the price of a product or service rises. That’s exactly how surge pricing, also known as dynamic pricing, works. If the demand for a cab is more than the supply on the app, the price for ride surges.

Surge fares of 5 to 9 times (5x to 9x in industry lingo) usual rates are not unheard of, though in India, the number generally doesn’t seem to go beyond 3x (hardly comforting). The surge price is not manually fixed but determined real-time by algorithms based on demand-supply dynamics for vehicles. Uber and Ola claim surge pricing incentivises drivers to go where the demand is, and brings about a balance between demand and supply.

Once this happens, prices get back to normal. Without surge pricing, app companies say, drivers would not cater to the spike in demand which would go unmet. When the Delhi government recently banned surge pricing during the odd-even rule period for vehicles, many Uber and Ola cabs stayed off the roads, leaving several commuters stranded.

To be fair, potential commuters are informed by the app about surge fares before the trip. So, you can choose the costlier ride or go with cheap alternatives such as a regular taxi or public transport.

Though cab aggregators have become the lightning rod for criticism about surge pricing, the concept is hardly new. Airlines do it, and so does everyone from the humble vegetable vendor to five-star vacation resorts. Even the Railways now prices fares dynamically for some seats. And most of us have paid higher fares, after much haggling, for autos and taxis in crunch times, haven’t we?

Why is it important?

Most commuters don’t buy the ‘it’s the market’ defence. They see surge pricing by cab apps as exploitative price gouging — making use of the helplessness of commuters to charge a bomb. Governments — representatives of the masses — tend to give in to the outrage (they have little choice) and try to stop surge pricing. Closer home, Delhi and Karnataka have banned it. Several economists trash such moves as unnecessary interference that distorts efficient pricing in a free market. Spruce up public transport to improve supply and let the market be, they aver. But others argue that while market pricing is all fine, it must also be seen to be fair to consumers.

The cab-app companies generally push back against restrictions on surge pricing, but sometimes do back off. For instance, after severe backlash, Uber suspended surge pricing during the Sydney hostage crisis and offered rides for free. It seems to be an unwritten rule to not let fares surge during calamities, crises and emergencies. But if you thought peak hours, the IPL T20 match, and odd-even traffic rules in Delhi are ‘extraordinary’ events, sorry; Uber and Ola don’t agree.

Why should I care?

Who likes to shell out more than the normal fare? But then, there is the trade-off between the ease of jumping into a comfy cab, and paying through your nose for the convenience. The debate across the world will hopefully throw up a win-win solution for app firms, drivers and commuters.

The bottomline

A smart alec in Bengaluru asked, “Do Uber and Ola operate from Surge-apur?”

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Published on May 09, 2016
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