Light touch guidelines to control surge

Regulation — which is based on force and fear — undermines the moral base of business dealings,” said Alan Greenspan, American economist (former chair, Federal Reserve of United States)

The law of “supply and demand” highlights that these forces pull against each other until market finds an equilibrium price. This is “perfectly” true, for an ideal market with no external forces acting. However, in practicality, it’s only “mildly” true. Considering the “regulate it all” approach of the government and the monopolies/oligopolies that exist, an ideal market is just another hoax. With new disruptive business models, the struggle is rather intense. “Surge pricing”, has all of a sudden become a buzzword. Yes consumer implications exist and regulations to safeguard consumers are required, but balancing is a key to all. For the start, let’s just avoid daunting with force and fear.

Taxi aggregation is one of the new disruptive technologies that has taken the world (including regulators) by surprise. It has been caught between the regulatory suspense and economics philosophies. Its effectiveness and increasing uptake is gradually shrinking the market share of conventional taxi businesses in India. The conventional taxi businesses are monopolistic in nature (owing to unions), and are tightly regulated. Every new technology brings along with it, few regulatory challenges, which needs to be addressed to make it more acceptable, effective and efficient. It is more like a new-born baby, which is groomed to make a better person, not thrown away the first time it poops.

Pricing is one of the most debated topics vis-à-vis taxi aggregators. Surge pricing is basic market economics, which is related to demand and supply. Surge is applicable on everything, starting from the food grains we eat to the trains/airlines we use for travel. However, since their pricing doesn’t mention the word “surge”, it is deemed “acceptable”. For example, the Indian Railways has its own version, i.e. the Tatkal booking system, wherein consumers are already paying a premium for the tickets for last minute purchases. Such mechanisms of pricing are referred to as “dynamic pricing”. The critical difference between surge and dynamic pricing is that the motivation of surge pricing is to address demand and supply gaps, as compared to the railways/hotel industry that has fixed capacity in short term and, thus, raise their prices (dynamic) as demand rises, resulting in exclusion of some consumers.

Surge pricing helps in correcting the unexpected and short-term imbalance between demand and supply where supply is restricted by incentivising service providers to increase supply. The increase in supply facilitates reining in surge. This is unique to the taxi aggregation sector as in other sectors like hospitality and aviation; dynamic pricing does not generate any new supply. However, at the same time, we also need to ensure that consumers are protected. Thus, introducing a differential capping regime for taxi aggregation could be a solution. Since the taxi aggregators have differentiated services on luxury parameters, it is advisable to have capping for only the “up to 1,000cc cabs”, which offer services to common consumers. For all cabs, over the capacity of 1,000cc, may be considered as luxury services, for which the fare-capping mandate need not be operated.

Innovative and disruptive technologies like Web-based platforms and aggregators are changing the face of traditional sectors — taxi operators, retail sale, banking, hospitality et al. These technologies provide immense value to consumers as they offer high quality services instantaneously and at affordable prices. While they provide consumer benefits, they are also contributing towards job creation, top priority for the country, as traditional industries are not generating enough jobs.

It is becoming extremely difficult to predict what sectors will create jobs in the future. Borrowing from famous economist Kaushik Basu, these technologies could be referred as “labour linking” technologies, which are also on the rise. With access to decent electricity and Internet connection, service providers in emerging economies can provide services to global corporations. Several customised platforms on the Internet have emerged (aggregators, e-commerce players, job platforms) which link demand and supply, thus creating direct and indirect employment.

Consequently, such technologies need to be conserved and promoted and should not be subject to unreasonable regulatory burden which might hinder their growth. It must be realised that such technologies cannot be treated at par with traditional service providers at all levels, and thus selective differential treatment will be necessary. Consequently, a complete overhaul in regulatory mindset will be required while dealing with these technologies, so as to avoid force and fear.

One such solution could be adoption of regulatory impact assessment (RIA) framework. This would go a long way in designing optimal regulatory framework for such technologies and also avoiding knee-jerk reactions with thoughtful regulatory analysis. RIA involves in-depth estimation and comparison of impact (costs and benefits) of different regulatory options on the economy, environment and society. RIA framework, when correctly implemented, can help in selection of such regulatory options, which could result in maximum net benefit to the economy.

The authors work for CUTS international