Surge Pricing in cab aggregation services

The time is 11:30 PM, your favourite band just ended their jamming session and you just now want to go back to your room, sleeping upon one of the best memories of your life. You open the Uber app and see what you have been fearing in the back of your mind. There is surge pricing with a multiplier of 2.5x.

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The rise in the ‘sharing’ or ‘gig’ economy has led to a shift from the traditional work culture with fixed working hours. One prominent example of this ‘gig economy’ is ride-sharing apps like Uber and Ola. Uber helps in connecting riders with the drivers, while setting fare for the ride based on the distance covered and total time taken to complete the trip. In case of high demand, Uber applies a ‘surge’ pricing to its fare which has been controversial since the introduction of feature.

As per the Uber website, the surge pricing works in 3 steps:

• Due to weather conditions, special events or due to rush hour, a higher number of people may request an Uber ride than usual. This will cause a supply-demand imbalance.
• To ensure that people who need the ride most, get it, Uber increases the fares.
• Riders pay for the ride or wait till the fares revert to regular price.
• Capping the maximum surge multiplier (It can be as high as 50x) and communicating it. Preferably, the cap should be 5x.
• Reducing the variability of price fluctuation – so that it does not change every 5 minutes
• Communicate the benefits of using the Uber service compared to conventional sources of transportation.
• Rebrand the surge pricing like a lot of negative connotation has been attached to it. Some alternatives can be convenience pricing, certainty pricing etc

The Surge pricing is calculated by using an algorithm which comes into action when demand outstrips supply in a fixed geographical area. The secret algorithm calculates the surge multiplier, which is then used to calculate the final fare. This multiplier is shown to both driver and rider before the ride is confirmed by the rider.

Since the Uber work on ‘Self-scheduling’ model where drivers have the full freedom to decide when to work. The decision of an Uber driver to drive in Uber is affected by his expectation of earning more and chances of getting rides etc. At the same time rider side demand has high fluctuations which make ‘Surge’ pricing necessary to balance both sides. ‘Surge’ pricing rewards drivers and at the same time efficiently allocates the limited resource, i.e. Uber ride to those who value it most. The absence of such mechanism can lead to an unprecedented level of demand in a rush-hour causing the waiting period to be so high that it limits the user from using the service of Uber. Castillo, Knoepfle & Weyl have argued that the absence of a regulatory mechanism like ‘Surge’ pricing can lead to an over-burdened system. This will lead to drivers being thinly spread throughout the city on a wild goose chase thus adding their pickup time and reducing their earning potential.

But surge pricing has been a contentious issue for the customers. A survey of 20,000 people on LocalCircles found that 64% of the respondents were not happy with the dynamic and surge pricing. The regular price of the same Uber ride acts as a lower reference point which makes ‘Surge’ pricing look unreasonable. Further, due to its very nature, the ‘Surge’ pricing kicks in when the customers are in a big hurry to leave the geographical area. The uncertainty around the timings of ‘Surge’ pricing and value of Surge Multiplier also does not help. There have been instances of ‘Surge Clubs’ being uncovered wherein drivers were coordinating with each other to trigger the ‘Surge’ pricing. They would do so by simultaneously turning their app off and on again. Recently one of the RSS affiliates has asked Road Transport & Highways Minister Nitin Gadkari to fix surge-pricing limits for taxi aggregators under the Motor Vehicle Act 2019.

So, can the Surge pricing be fixed so that all the three stakeholders be happy with it – Riders, Drivers and Uber?

As per Professor Utpal Dholakia of Jones Graduate School of Business, the surge pricing has a significant image problem. He suggests following four actions to improve it,

Uber’s pricing algorithm works for the betterment of both riders and drivers but to gain the mindshare they need to make the ‘surge’ pricing more open and rider-friendly.

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References

• How surge pricing works. (2019). Retrieved 19 September 2019, from https://www.uber.com/in/en/drive/partner-app/how-surge-works/
• Gérard P. Cachon, Kaitlin M. Daniels, Ruben Lobel (2017) The Role of Surge Pricing on a Service Platform with Self-Scheduling Capacity. Manufacturing & Service Operations Management 19(3):368-384. https://doi.org/10.1287/msom.2017.0618
• Chen, M., & Sheldon, M. (2015). Dynamic Pricing in a Labor Market: Surge Pricing and Flexible Work on the Uber Platform.
• Hall, J., Kendrick, C., & Nosko, C. (2019). The Effects of Uber’s Surge Pricing.
• Juan Camilo Castillo, Dan Knoepƒe, and Glen Weyl. 2017. Surge Pricing Solves the Wild Goose Chase. ACM Transactions on Economics and Computation 1, 1, Article 1 (January 2017), 2 pages. DOI: hŠp://dx.doi.org/10.1145/3033274.3085098
• Zha, L., Yin, Y., & Du, Y. (2017). Surge Pricing and Labor Supply in the Ride-Sourcing Market. Transportation Research Procedia, 23, 2-21. DOI: 10.1016/j.trpro.2017.05.002
• Why Do Consumers Hate Uber’s Surge Pricing?. (2019). Retrieved 19 September 2019, from https://kinder.rice.edu/2016/01/27/uberhatesurgepricing/#.Vqkf5_krLct
• Uber drivers are reportedly colluding to trigger 'surge' prices because they say the company is not paying them enough. (2019). Retrieved 19 September 2019, from https://www.businessinsider.in/Uber-drivers-are-reportedly-colluding-to-trigger-surge-prices-because-they-say-the-company-is-not-paying-them-enough/articleshow/69790042.cms
• Bhattacharya, A. (2019). Indian Ola and Uber riders are fed up of surge pricing and driver cancellations. Retrieved 19 September 2019, from https://qz.com/india/1472888/indians-are-sick-of-ola-ubers-surge-pricing-cancellations/
• Stop Ola, Uber, surge pricing, fine them for cancellations: RSS affiliate tells govt. (2019). Retrieved 19 September 2019, from https://www.businesstoday.in/current/economy-politics/stop-ola-uber-surge-pricing-fine-them-for-cancellations-rss-affiliate-tells-govt/story/379774.html
• Everyone Hates Uber’s Surge Pricing – Here’s How to Fix It. (2019). Retrieved 19 September 2019, from https://hbr.org/2015/12/everyone-hates-ubers-surge-pricing-heres-how-to-fix-it
• Photo by Thought Catalog on Unsplash