(Repost from Wordpress, original date 2022-06-05)
[EDIT 1 (18 July 2023): Several ride aggregation apps have started to implement exactly the solution I describe in this piece!1]
A few weeks ago, The Economic Times reported on the state of the cab experience in Indian cities. TLDR, everything is bad. Here’s the story in two parts.
Part one, a crisis on the drivers’ end. Nobody wants to drive cabs anymore! This is unsurprising, since high fuel and CNG prices have been cutting down on the already thin margins of cab and autorickshaw drivers. After the (over 20%!) commissions cut taken by the cab aggregator companies (Ola, Uber) and GST, drivers take home little. The effects are exacerbated following two years of dull to nonexistent business, while EMIs continued to hit. With this all happening at a time of high consumer price inflation, it is unsurprising to learn that the number of cabs in Bengaluru fell from over 1,00,000 pre-COVID to around 30,000 today. The past two years saw large numbers of migrant cab drivers leaving the job to move back to their hometowns.
Part two, a crisis on the customers’ end. Nobody wants to drive cabs anymore! And a supply-side crunch means a poor experience for the rider. Customers complain about unbearably long wait times, drivers frequently canceling rides, refusing to turn ACs, and demanding extra charges. This week, some of my colleagues were complaining about ending up having to take an hour-long walk home after work — in central Bengaluru. Meme:
So it sucks from both ends.
But wait — something’s wrong. Markets usually don’t suck from both ends! When one side (either the buyers or the sellers) is desperate to trade, the other side can make a killing. If customers are so desperate for cabs — which they are — why don’t we have drivers rolling in cash, instead of quitting by the thousands? Here’s some theorizing, and my proposed solution.
In the early days of the cab aggregator industry, when the market had still not settled in, the public perception of “surge pricing” — the practice of increasing cab fares when demand was high — was that it was a predatory act by big companies to exploit poor desperate customers. The complaints got picked up by policymakers, who made sure to include price guidelines (“surge price ceilings”) in the Motor Vehicle Aggregator Guidelines 2020. The primary purpose of dynamic pricing is to encourage more drivers to take up gigs during times of high demand. However, once the states started implementing these guidelines, aggregators found themselves with limited ability to incentivize such behavior, and so cab aggregators could no longer do much to increase driver supply during peak hours. The outcome of weakening the power of surge pricing was predictable: with reduced incentive to take up more rides during peak times, we have far fewer drivers active during these hours than we used to. Additionally, the law also strictly reduced the drivers’ total incomes, since peak-hour rides didn’t sell for as high as they used to, but off-hour fares didn’t really increase. This likely encouraged many of them to leave the business, further reducing the supply of drivers during peak hours. The effects of this change of course were hidden by COVID, so we didn’t really notice. As demand approaches pre-pandemic levels, the folly is revealed.
This law was unfortunately a very on-brand move. India has a long history of price controls, with almost every instance of it followed by a supply crunch (vaccines, brand name drugs, onions). Outside of the occasional scenario where one supplier (or a group of colluding suppliers) has a monopoly and engages in price gouging, price ceilings never accomplish the goal of making a good more accessible to the public. Often, like in today’s situation, the opposite outcome occurs — the good becomes even harder to access as suppliers withdraw. The philosophy of top-down government control — a relic from the British Raj and the socialist eras — remains prevalent in legal and political thought.
Why do policymakers not fix this right now? I’m not fully sure, and I hope to understand better in general why our policies have so many economic blunders, but here’s my impression. Members of the Parliament and Legislative Assemblies do not hail Olas and Ubers, so they are unaware of the experience of the real-world long-term effects of the price controls. When their constituencies complained of high prices during surge hours, they saw the opportunity to fulfill a major demand at low political cost — and they did. The complaints of the cab companies were publicly ignored, to demonstrate the intent to stand up for the citizens against the big corpos. Now, when the economic consequences are playing out, the government finds that backtracking on its move would have political costs. Besides, there is no straightforward request from the populace — one that can be fulfilled — because there cannot be a public movement based on principles of economic theory.
The correct move of course would be to remove the price controls. There is fierce competition in the cab aggregation business today, and so no company that engages in price gouging can survive. There may be some high prices for a while, but eventually we’ll settle at reasonable prices again when more drivers decide to pick up the lucrative gigs. I’ll be ecstatic if this were to happen, but it will likely not; at least not easily, and not soon. It’s just too… surreal, the idea of the Indian state proactively stepping back from central planning.
But here’s a solution I think is possible.
We need to circumvent the state to somehow allow bargaining to happen again — allow customers and cab drivers to flexibly decide the fare based on the dynamic realities of supply, demand, and urgency. The law prohibits this from being done through the fare directly, but it can be done indirectly — via tips! Yes, tips. Tips are often given at the end of a service, but offering them before is not unheard of: food delivery apps like Swiggy and Zomato give the option of tipping the delivery partner while placing the order. Cab aggregator companies can implement a similar mechanism — with the crucial added tweak of also displaying potential driving partners the tip offered for taking the gig. Then — behold — the market is set free again! Each customer, when booking a cab, can offer a tip to sweeten the pot, based on how hard it is to find a cab and how urgently they need one. And crucially: the tip can go as high as necessary. This brings the game back to being a simple Reverse Dutch Auction2. If a customer cannot find a ride, they slowly raise their offered tip until they do, or until they decide that it’s not worth it. The total price of a cab ride — including the tip required to get one — once again gets to be decided by the sane dynamics of supply and demand. And we’re done! We’ve run a circle around the state and fixed the market!
There is no guideline around tips in the Motor Vehicles Aggregation Guidelines — the definition of “fare” is the amount debited to the aggregator, and so tips debited directly to the driver shouldn’t be subject to controls. The tip is an even stronger incentive for drivers to return than increased fares — there wouldn’t be any commission on it.
Everyone’s better off3. Cab drivers are obviously strictly benefitted by this system, since tips are positive. Cab aggregators make the same commission off the rides as the fixed fare, but more drivers start to accept rides more often, increasing their revenue. For customers, service is more reliable — they know that cabs are always available if they really need one, as long as they’re willing to offer enough money — and more regular, as more cab drivers enter the industry. And everyone should be better off! It’s a market!
Can this solution be implemented? I don’t see why not. Perhaps there is something in the way, and I hope to find out. Does it adversely affect the business interests of the aggregators in some surprising way? Or is it not legally viable? A friend of mine tells me the courts could interpret “fare” to include the tip, thereby including it in the price control, and that a single circular could fix this loophole. I still think there’s a chance this can fly if done right, and more subtly than I described. If you know how it can go wrong, tell me.
On the other hand though, if Ola and Uber do realize how amazing the idea is and implement it, and decide to hire me immediately for more state-circumventing-consultations, you know where to find me. But you’ll have to arrange my ride to your office, because good god I am not booking a cab in this economy.
Rapido and Namma Yatri in Bangalore, two ride aggregation apps, now have an option to offer tips to increase the chance of hailing an autorickshaw. This is only for autorickshaw rides, but this counts, autorickshaw fares too are governed by the Motor Vehicles Act — even more rigidly, in fact, than cab fares. Economics wins! Will the city fight back? Find out next time on The Indian State Continues to Flirt With Price Ceilings in Competitive Markets Even Though It’s 2023.
While auto drivers can see the exact fare while accepting a ride, cab drivers cannot — they only see the approximate pick-up and drop locations (this is true of the major cab aggregators). I’m not sure why this is, but because of this, the bargaining game is not exactly a reverse Dutch Auction for cabs. But it’s close enough.
This is not strictly true. Due to the price control, in the current situation supply does not keep up with demand, so during peak hours the limited cabs are essentially randomly allocated to customers seeking them. There is a small fraction of customers — the marginal customers who would not be hailing a cab if the prices were at the natural value but are willing to book one under the controlled prices — who will on some days win this lottery. The price control benefits them, since if prices were returned to the equilibrium point, they would never take cabs. But this is a small fraction of users, and the benefits to them are negligible in comparison to the monumental costs to everyone else and the economy as a whole.