Widget Image
HomeEconomicsSurge Pricing: In Defence of Trivial Things

Surge Pricing: In Defence of Trivial Things

Surge Pricing: A Market based solution

Ujwal Batra

‘Surge Pricing’ is a misnomer. Surge Pricing, as defined here, occurs when a company raises the price of its offering if there is an increase in demand.

Prices, as anyone who has taken a course in Econ 101, are sensitive to demand. With an increase in demand, prices rise (and vice-versa).

Technically then, surge prices are, well, prices. Of course, the practice refers specifically to Uber’s and other cab services’ practise of adjusting their fares when there is a ‘surge’ in demand.

Prices, as described wonderfully here, are incentives wrapped in knowledge.

There has been a lot of discontent in the last couple weeks with Uber and surge pricing, a practice that barely anyone complained about before the Delhi government (or more precisely—Kejriwal) embarked with the second leg of Odd-Even exercise. I didn’t care very much about the entire affair, but was prompted to write this after I read this column which calls Uber’s surge pricing not merely unfair, but also unethical and unconstitutional. That sort of sentiment and angst ought to be reserved for sterner stuff and more pressing issues, this is a reasonably trivial matter, I thought. But then again, I hardly use cabs. Who am I to judge?

The present episode provides an opportunity to look at what prices mean, and what they do. Prices, as described wonderfully here, are incentives wrapped in knowledge. They make us act in particular ways—an increase in price would urge consumers to conserve on a particular resource and make entrepreneurs and businesses come in to meet demand. A drop in prices would similarly compel various stakeholders to adjust their behaviour accordingly. The efficiency prompted by the price system is what makes a market-economy possible. Price rationing does not work, we’ve got four-thousand years’ worth of history to illustrate that simple fact. Venezuela will suffice as a recent example.

Technically , surge prices are, well, prices and are sensitive to demand

Surge Pricing is a misnomer and had gone unnoticed until the Delhi Government embarked upon it | Photo Courtesy: Visual Hunt

Coming back to Uber. Surge pricing, for one, will incite drivers to be on the road for longer hours. Drivers with Uber choose how long they want to be on the road, they shut off their device when they don’t want to ferry passengers. In fact, the reason that prompted Uber to come up with dynamic pricing was the fact that Uber drivers wouldn’t always be available when there was a spike in demand, typically on Friday and Saturday nights. This resulted in a lot of ‘unfulfilled requests’ (which is bad business). Dynamic pricing was a way to incentivize drivers to be on the road when demand spiked. In Boston, “by offering more money to drivers, they were able to increase on-the-road supply of drivers by 70-80%.”

Surge pricing would similarly make consumers conserve on rides. I would only book a cab if the price is worth it—else I would choose to go by public transport or an auto, freeing up that ride for someone who might need it more, maybe someone who has to rush to the airport to catch a flight.

Surge pricing, then, is a market-based solution to a very real problem, is it not an instrument to fleece consumers.

There is another concern involved here—the question of autonomy. Do we live in as intolerant a society that we cannot allow businesses to have the autonomy to decide how they want to charge their services? It ought to be a business’ prerogative to decide what it wants to charge its consumers. In this, it is constrained by a number of factors—the consumer’s willingness to pay and market competition. But a business offering its services at a particular price in no way compels the consumers to do business with them. They can move to competitors or use substitute services (this again, acts as a market signal). It is quite amusing to observe people feeling entitled to a service we didn’t have till a couple years back (entitled enough, at least, to force Uber to suspend dynamic pricing). I can conceive of instances where it might be necessary to interfere with businesses’ autonomy or prices, but Uber employing surge pricing doesn’t qualify, not by a long shot.

It ought to be a business’ prerogative to decide what it wants to charge its consumers.

In defending trivial things then, we need to tackle certain fundamental and not-so-trivial questions of autonomy and coercion. That’s pretty cool, right?

This article was originally published on Spontaneous Order.

Ujwal Batra works in CCS Academy and is the editor of the blog Spontaneous Order.

The Indian Economist has rebranded to Qrius. We’ll continue publishing authoritative commentary and analysis on issues you care about. Qrius is run by the same team as The Indian Economist, and continues hosting the talented contributors, writers & partners that produce the content you love. We look forward to your support.