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Fallout of ruling on surge pricing

Vinod Vyasulu August 16, 2016, 0:27 IST

The HC could easily have told the govt to make a transportation policy to meet people's demands – and needs.

The news media is excited about the High Court order in Delhi that prohibits taxi aggregators Uber and Ola from what is called ‘surge pricing’. This is a practice in which the taxi aggregator, using complex algorithms, equates supply for taxis with the demand for them to ensure that available taxis find a customer. Around what may be called a standard fare – such as Rs 10/km, the algorithm balances available cabs with demands for their services.

If one is in a remote location, late at night, there may be few cabs – say three – in the neighbourhood. This is a supply constraint. If then, there is a demand from five customers for cab services, what is to be done?

The algorithm matches
destinations, distances to be travelled, the density of traffic on given routes etc to match a cab and a customer. In doing so, it varies the fare. The one willing to pay the highest, gets the cab.

Those who are not willing to pay the higher price have to do without a cab. Need is different from demand. All five need a cab. Only those willing to pay the higher price had a demand for a cab. Markets deal with demand, not the need. Since there is a supply constraint, the fare – price here – is expected to rise. By how much, is determined by the algorithm. If too much is asked for, no one may take up the offer. The supply and demand must match at some point. Modern information technology makes such calculations possible in real time.

We, in India, are no strangers to scarcity. I remember that in the early 1970s, one had to wait for over six years to get a Bajaj scooter. We have all lived through this – that is how markets function. Those who could afford it, paid the premium and got the scooter without a wait. The one who had the allotment, extracted what economists call a ‘rent’. How is surge pricing different from the premium on that Bajaj scooter?

The HC has not made this distinction between need and demand. By capping surge pricing, it has effectively reduced the incentive some drivers may have to work late at night. Supply of cabs can be expected to reduce. At the standard fare, customers will just find no cabs available.

The court cannot order drivers to work if they choose not to. And those customers, who, for whatever reason, are ready to pay higher fares for such a service, will now not get it. There will be dissatisfaction both among drivers who want to work more, and customers who are willing to pay more.

Of course, these things may not happen if we had an efficient public transportation system. And taxi aggregators provide a valuable service to one segment of the population in such a situation. It is no different from the old days of the Bajaj scooter and its premium.

There is another aspect to this court decision. The court could easily have told the government to make a transportation policy to meet people’s demands – and needs.
This is the domain of the executive government – whether it is the Delhi under the chief minister or the one under the Lieutenant Governor is a different question. But policy-making is not the domain of the court. The courts interpret law within the constitution, not make it.

The BCCI case
This issue has come to the forefront in the case of the Supreme Court (SC) mandated reforms of the Board of Control for Cricket in India. An SC-appointed committee, headed by a former chief justice, made recommendations regarding reforms. The SC ordered that they be carried out.

The BCCI responded by approaching another former Supreme Court judge Markan-deya Katju who advised them that these recommendations violated the constitution. It is no business of the SC to make laws. Under what law, asks Justice Katju, has the SC passed this order? In fact, it has violated existing laws, as the BCCI is registered under the Societies’ Act in Tamil Nadu.

There has been much talk of the judiciary over-reaching itself. Is this order on surge pricing, which goes against market logic, based on some law? Yes, the Delhi government appealed. But what should be the response within both economic logic and the existing law? Economic logic would say, let surge pricing be. Set up a regulator to ensure there are no illegal practices, but within that let the market function.

I am no lawyer. But the court could have suggested that the Delhi government pass a suitable law. If, in its wisdom, the Delhi Assembly passed a law that cab fares cannot exceed X rupees a km, then surge pricing could be struck down.

But, if the Delhi government passed such a law, and cabs disappeared from the roads, would the courts order cab drivers to operate anyway? These are issues for us to mull on. Meanwhile, it will be interesting to watch the next step in the Uber-Ola drama in Delhi.

(The writer is Professor and Vice Dean, Jindal School of Government and Policy, Sonipat, Haryana)

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