Can Uber Balance Demand And Supply Without Surge Pricing?

App-based taxi services like Uber and Ola have transformed India's urban transporation system. These taxis are cheaper than autorickshaws, partly because ordinary taxis and autorickshaws are regulated in India, while services like Uber and Ola are not yet within the ambit of such stringent regulations.

Governments across the world are hesitant to regulate technology-driven businesses. But the Delhi government recently banned surge pricing for Uber, Ola and other cab services.

Regulators assume that taxis and autorickshaws charge people too much, so they stipulate a rate beyond which these services cannot charge. But how does one decide whether taxis are charging too much? It is not possible to logically prove that a certain good is worth a certain amount of money. It is supply and demand that determine market prices.

Taxi drivers, for example, will charge more when more people demand their services. If there is less demand, they will charge less. But there are, of course, imperfections in how the market works. Taxi drivers and consumers are rarely able to accurately assess supply and demand. There is usually not much we can do about this because the market is large, and it is impossible to have perfect information. In case of services like those of Uber, however, technology helps balance supply and demand to a fair degree.

Though it has been criticised widely, economists love Uber's surge pricing. If you think taxis overcharge people, there is no reason why you should hate surge pricing. With the existing level of technology, it may be the most efficient way of matching supply and demand. At a time when taxi drivers were deciding fares arbitrarily, here is finally a way to stamp out arbitrariness to a large extent.

Ananya Kotia, a consultant at National Institute of Public Finance and Policy, says: “Why would a taxi driver plough through the mess of Delhi's Hauz Khas Village, if he can earn the same by ferrying passengers from Khan Market?” Not every service is equal. It is true that not many drivers love to ferry passengers way past midnight. It is true that not many drivers love to drive through potholed roads.

On some days, the demand for Uber cabs is so high that most people would go without cabs if surge pricing were not there. This happened when Uber suspended dynamic pricing about a year ago. Blogger Amit Varma points out: “In Uber's case, with their dynamic pricing disabled, all their cars quickly got booked, and whichever customers switched on their apps after that found that there were no cars available. Their need could have been urgent; they may have needed to rush to the airport to catch a flight they couldn't afford to miss; or take an ageing relative to hospital; or head to town for a make-or-break meeting. But even if they were willing to pay more, too bad.”

If the government lowers prices artificially, prices will rise in the long run. So, instead of ensuring stable, lower prices for everyone, most people will end up paying much more than they would, if the government bans surge pricing for ever.

There is another reason why surge pricing is good. Among the reasons why real estate in central parts of Indian cities is expensive is because transportation is highly expensive in India. It is often much cheaper to live in the heart of the city than living in the periphery and travelling to markets in the centre. If transportation is cheaper and much easier, more people will live in suburbs and periphery, allowing real estate prices to stabilise.

Urban Indians deserve to live in more spacious houses. If transportation is so expensive, this will be difficult. As taxis of Uber and other companies are chauffer-driven, they also allow people to work or read when they travel. One of the factors that prevent many from using these taxis is that it is not easy to find cheap service when they need it. Surge pricing is one of the many ways in which they can make this happen