Uber and the art of surge pricing

Recently, I was chatting with some Uber drivers while riding with them in Bengaluru and got a couple of interesting responses when I asked them about the hottest topic going around these days: surge pricing.

One driver said that it is actually called “sugar” pricing because it allows the driver to make some extra sweet money. The other driver’s response was even better. He said it is actually called “surpricing” because Uber randomly picks up a customer and surprises him or her with higher prices. In case you are wondering, both the drivers spoke in all earnest and without any sarcasm.

Simply put, surge pricing is a supply-and-demand phenomenon. When demand (riders requesting an Uber ride in an area) exceeds available supply (drivers in that area), surge pricing kicks in. The more the gap, the higher the surge. The amount of surge is determined by the supply demand gap at a particular point in time in an area.

Surge is area-driven and it is impossible for an entire city or country or world to surge at the same time. Of course, when supply is adequate to service the demand in an area, there is no surge.

The only way to counter surge pricing is to balance supply and demand. Cities in India like Bengaluru and Delhi that have taken to populist and aggressive posturing against surge pricing are barking up the wrong tree. If they wanted to use this opportunity to score brownie points politically, then they clearly missed a trick here.

Ideally, they should have understood that high demand means customers love the Uber service and help improve supply by creating additional (say) 100,000 new jobs. A new scheme wherein deserving, qualified and eligible 100,000 entrepreneurs could get some funding under easy financing terms to buy a cab, become an Uber driver, become economically independent, help ferry riders around and, would help reduce surge pricing.

Instead, Delhi (based on complaints by auto drivers) has threatened to take action against surge pricing, without understanding that most riders using Uber do not pay surge. Instead they get such cheap fares that they actually save money.

So, if Uber is forced to stop surge, they could simply hike flat fares upwards such that they are still cheaper than an auto. Every rider will end up paying Uber more instead of less.

In other words, Uber prices will go up, commuter savings will go down, auto drivers will continue to complain because Uber will still whip them on service and price and the government can pat themselves for solving the wrong problem.

Equally strange has been the recent decision by Bengaluru to limit Uber pricing to the government-set rate of ₹19.50 per km. I am not sure why the Karnataka government should be setting cab fares. They should only be concerned if customers are being cheated, which they are not.

I have used Uber under surge on several occasions and every time I have been asked to accept the higher fare and sometimes even input the surge levels on the app as a token of acceptance.

I have no problem with this although I would be mighty hassled if I came to know about surge after my trip ends. This is the only condition the government must impose: that riders must know and accept surge before asking for a ride.

Here’s another tip to the Karnataka state government on how to destroy surge. Expand the city metro network quickly to touch far flung- areas such as Whitefield and the airport. Then watch what happens to surge pricing; it will come crashing down because demand will drop. Commuters will use cheaper, comfortable and convenient public transport.

Recently, Professor Chris Nosko at the Booth School of Business, Chicago conducted a detailed and interesting study on the impact of Uber’s surge pricing by studying its impact on two events in New York City: New Year’s Eve December 31, 2014 / January 1, 2015 and a popstar concert on March 21, 2015.

The detailed study and data suggests that the surge after the concert attracted more drivers to the surging area, all hoping to earn extra money, thus bringing down prices and pick-up times because the gap between demand and supply reduced.

On the other hand, when the Uber surge algorithm failed on New Year’s Eve, additional drivers did not enter the surging area as they were unaware of the surge, and demand kept exceeding supply so much that fewer riders eventually took advantage of Uber while prices and pick-up times remained high.

Complaining to the government on pricing sets the wrong precedent. Aggregators like Uber must be regulated to ensure they conduct enough due diligence in collecting information from drivers before adding them to the platform; ensure they possess the tools and systems to track rides; install, implement and follow prescribed safety procedures. But why should the government worry about and set cab rates?

Let Uber charge me whatever they want, as long as I am free to choose alternative modes of transport I don’t care. News reports suggest that the TfL (Transport for London) authorities want to pass a law that will allow Uber drivers to pick up passengers after a five-minute delay because they are too efficient right now and impacting the existing London cabbies. Huh?

And here I am thinking that governments must encourage efficiency of private enterprise. Let me conclude with an example of another city that is taking the opposite approach. Recently, Altamonte Springs, a suburb in Orlando, Florida, USA decided to subsidise Uber rides from the city budget for a year-long experiment.

They believe that Uber ride-sharing is really a form of public transport that can decongest the city roads and improve transportation for commuters.

Irrespective of how the data comes up after a year, it just shows that different cities in the world are trying different methods of dealing with how Uber is influencing global transportation.

We, in India, must also think and decide what’s the best way forward, but I have no doubt that setting cab rates is certainly not what the state should be doing.

The writer is an internet and retail entrepreneur and e-commerce pioneer. The views are personal