Explaining Ola and Uber's surge pricing

Uber says surge pricing is to ensure there are more taxis on the roads. But is that really so?

April 19, 2016 06:19 pm | Updated November 17, 2021 04:50 am IST - Chennai

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.

How does it ensure more taxis on the roads, you ask?

The pricing mechanism kicks in when demand outstrips supply. The company says the increased fare acts as an incentive for taxi drivers to stay on the roads and helps in balancing the demand with supply.

The price surge is driven by algorithms and lasts only for few minutes, and the rates get revised depending on the demand-supply gap. The company claims “surging only last for a few minutes depends on the demand and the amount of available drivers in your area.” Uber’s competitor Ola also employs a similar pricing mechanism.

Why is surge pricing in news?

>Uber and Ola, on Monday, suspended surge pricing after commuters took to social media, alleging that rates were hiked on the first full working day of the Odd-Even scheme. There were reports of people paying up to 4.7 times the normal rates during peak hours. Earlier this month, the Karnataka Govt. too banned surge pricing.

How much will surge pricing cost me?

Uber provides three taxi options, depending on the number of passengers – uberGO, uberX and uberXL. The cheapest of the three, uberGO, has a base fare of Rs. 40 and charges Rs. 7 per km and Re. 1 per minute. Ola Mini, a uberGO equivalent from Ola, charges Rs.100 for the first 4km, and Rs. 8 per additional km. The ‘ride time charges’ are Re. 1 per min.

Here’s how much it will cost to travel a distance of 20 km with and without surge pricing (assuming travel time 1 hour, calculated based on the average travelling speed in Delhi as 20kmph)

uberGOBill amountEffective per km rate
without surge pricingRs. 240Rs. 12
with surge pricing (1.2x)Rs. 288Rs. 14.4
with surge pricing (2x)Rs. 480Rs. 24
Ola Mini (all rates, minus service tax)
without surge pricingRs. 288Rs. 14.4
with surge pricing (1.2x)Rs. 345Rs. 17.2
with surge pricing (2x)Rs. 576Rs. 28.8

In Delhi, the Govt. prescribed taxi rates are Rs. 12.50 per km for Economy Radio Taxis, Rs. 14 per km and Rs 16.00 per km for non-AC and AC yellow taxis respectively. But it’s not just the taxis who adjust their prices according to the demand. Dynamic pricing is commonplace. We’ve seen them while travelling using private airlines, and even with the Indian Railways. But the ‘need to incentivise the service provider’ angle needs further clarification.

Interestingly, >this case study aimed at understanding the economics of Uber’s surge pricing algorithm found that, without the price surge, driver would have made 13 per cent less than what they made with surge multipliers applied, among others.

However, the validity of the study across geographies, especially in the context of the impact of the rules imposed by the State, needs to be seen.

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