Surge pricing sullies image of cab aggregators

The new millennium is one of perennial transformation. In the field of technology, one can think of many things including, of course, the ICT (Information and Communication Technology) revolution.

One should not, however, look only at technology. There are equally exciting things happening in the institutional structures too. This article concentrates on an instance of this kind which is in the news for wrong reasons. The focus of this article will be on the emerging institutional set-up of taxi aggregators.

It was Harry Nathaniel Allen of New York who coined the word “taxicab” in 1907 by combining two French words taximetre and cabrioler to describe a vehicle with a driver for hire to carry passengers between locations of their choice. In common parlance in India, the words taxis, cabs and taxicabs are used interchangeably and refer to cars with drivers. A customer can hire a cab by hailing one which is not engaged already by somebody else and is passing by. It can also be done by going to a taxi stand where cabs for hire are parked. The development of telecommunication has resulted in making even this travel by the customer, to the place where taxis are available for hire, unnecessary. As they say, instead of Mohammad going to the mountain, it is the mountain which goes to Mohammad these days.

This role reversal does convenience the customer considerably. There remains another problem, however. A customer wanting to hire a cab may not know where the nearest cab is available. Further, even if this information can be obtained, it might come at considerable cost in terms of time and money. If all the cabs in a city are owned by just one company, the office of that cab company will easily have this information.

This advantage to the consumer may be more than compensated by the temptation to misuse the monopoly of the cab company. But even if there are a large number of cab operators, each owning at the most a few cabs each, technology does exist by which one can know the location of each cab at any particular point of time. There is also an easy mechanism by which the fact that a customer wants to hire a cab in a particular area can be communicated to all cabs in that area.

Two enterprising techies – Travis Kalanick and Garret Camp – could easily infer in 2009 that as a result, sheer self-interest will make cab drivers look for customers in an area and automatically respond to requests for cabs for hire in that area.

This resulted in the creation of Uber – a company with unique features. The company is a mere aggregator of cars for hire. It owns none of the cabs given on hire through it. Most of the cabs are owned by the drivers themselves. Some cab companies owning fleets of cabs and employing drivers for them also get tagged on to Uber. It has to be noted that the cab drivers are not considered as employees of Uber. So, here is a company where the labour involved in the major portion of the service provided is not in the employment of the company.

New millennium

Further, the investment in the capital equipment used to provide the service - car for hire - is not that of the company. The new millennium has thus witnessed the creation of a novel institutional species - a company which provides a service utilising capital that does not belong to it and without employing the labor involved directly in providing this service.

Considerable midnight oil gets burnt in discussing the pros and cons of this framework. At one extreme, the company is shouting from the rooftops that it is out to increase consumer satisfaction in cab hiring and to that extent promote human welfare. At the other end are those who look upon it as a convenient device to overcome minimum necessary regulation imposed to protect the interests of the consumer. The innumerable court cases and the struggles in different parts of the world that the company and other cab aggregators have to face can therefore be looked upon as parts of the fine-tuning required to adopt this new institutional framework.

While welcoming this institutional innovation, one should not, however, adopt an attitude that the king can do no wrong. In trying to introduce surge pricing, cab aggregators including Uber have sullied their image. Blind supporters of this concept in the cab sector have even gone to the extent of saying that it leads to an increase in the supply of cabs conveniently ignoring the fact that increase in supply means a rightward shift in the supply curve and not a simple movement upwards along the same supply curve.

A stronger argument for surge pricing in this sector seems to be that it exists in the hotel and airline sectors. But such an argument ignores the basic difference of these two sectors from the taxi cab sector. Most of the fixed capital invested in these two sectors is in the nature of some form of sunk capital in the sense that it cannot be put to alternative uses in any other sector, whereas it is not so in the case of the taxi cab sector. A taxi owner can, on the other hand, easily sell the cab to a private individual for his personal use.

It is, hence, gratifying to note that a number of state governments have called a spade a spade and disallowed surge pricing by cab aggregators, who have put the practice that they had started on hold.

(The writer is retired professor, Department of Business Economics, University of Delhi)

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