DOES SURGE PRICING

REALLY HELPS??
 In the event that there are relatively more riders
than driverpartners such that the availability of
driverpartners is limited and the wait time for a
ride is high or no rides are available, Uber employs
a “surge pricing” algorithm to equilibrate supply
and demand.
 The algorithm assigns a simple “multiplier” that
multiplies the standard fare in order to derive the
“surged” fare. The surge multiplier is presented to
a rider in the app, and the rider must acknowledge
the higher price before a request is sent to nearby
drivers.
 Uber and other cab aggregators operate in a
market with large fluctuations in demand and
a variable supply of driver-partners.
 Driver partners are free to work wherever they
want and must be incentivized to provide these
services.
 The pricing mechanism kicks in when demand
outsrips supply. The increased fare acts as an
incentive for the taxi drivers to be on duty and
helps in balancing the demand with supply.
 A surge in price indicates the riders that there
is a high demand in the area and as a result
encourages them to opt for a cheaper available
form of transportation e.g. Public transport,
which ensures that the rides are availed by the
people who value them the most.
 A simple hypothetical calculation shows that
without surge taxi drivers in a high demand
zone would have made 13% less than what
they would have made with surge multipliers
added.
 Here’s how much it will cost to traverse a distance of 20 kms with and without
surge pricing(assuming travel time hr, calculated based on the avergae
travelling spped in delhi of 20 kmph

uberGO Bill amount Effective per km rate

Without surge pricing Rs 240 Rs 12
With surge pricing(1.2x) Rs 288 Rs 14.4.
With surge pricing(2x) Rs 480 Rs 24
 Surge pricing, according to Uber, comes into effect
“when the taxi demand is higher than drivers
around you.” The company claims that the surge
pricing ensures that more taxis ply on the roads
and helps meeting the increased demand.
 The first beneficial effect of surge was to increase
the number of driverpartners in the area. Surge
signaled that this was a valuable time to be on the
road, and driverpartner supply increased by up to
2x the presurge baseline.
 This increase in driverpartner supply was a net
win for riders in the area because more of them
were able to take advantage of Uber services.
 The second effect of surge pricing was to allocate
rides to those that value them most. While the
number of app openings increased dramatically,
the number of actual requests didn’t increase by as
much.
 From an economic efficiency standpoint, this was
highly beneficial because those that ended up
requesting a ride are those for which their outside
option was worse, leading them to value Uber
more in that particular moment.
 I do believe the surge pricing rule helps both
the cab aggregators and consumers to negotiate
the increase in demand of cabs during peak
hours and also reduces the stress of costs
incurred by the partner-drivers.
 Efficiency gains come from both an increase in
supply from driver partners on the road and an
allocation of supply to those that valued rides
the most. Most of the increase in prices was
passed on to the driver- partners who
benefitted from the increased demand.
 Drivers were likely less attracted to the
platform while, at the same time, riders
requested rides in increasing numbers because
the price mechanism was not forcing them to
make the proper economic tradeoff between
the true availability of driverpartners and an
alternative transportation option. Because of
these problems, completion rates fell
dramatically and wait times increased, causing
a failure of the system from an economic
efficiency perspective.
 Increased fare, implying increased profit, acts as an
incentive not for those cabs already plying, but for
introduction of new ones. That is how supply shall
be brought up to demand and then prices go down
naturally. If you prevent cab-drivers/aggregators
from making high profit in this initial phase, one of
two things will happen: either, cabs will continue
to remain in shortage, or they will find a way to
charge you off-record (like autowallahs do despite
what the meter reads).
 Airlines charge more for tickets during peak times.
Autos and Taxis have a night surcharge. So, why
complain for a surcharge when there is high
demand?