The business models of major online taxi aggregators may be headed for a test in India.
On April 6, the southern Indian state of Karnataka announced a ban on surge pricing—the practice of raising fares when demand for taxis is higher than supply. The new law said that online cab-hailing services such as Ola and Uber cannot charge more than Rs19.50 per kilometer for an air-conditioned taxi and Rs14.50 for a non air-conditioned one in the state.
The move could hurt Ola and Uber who often make between two and four times more money on a ride if supply is short. Karnataka’s capital city Bengaluru—India’s technology hub—is a major market for the two taxi aggregators.
The law may be replicated in other Indian states. Maharashtra is already considering a similar ban, the Business Standard newspaper reported.
Ola and Uber did not immediately respond to queries from Quartz.
Surge pricing is an effective tool for companies to make the most out of a supply-demand mismatch. The practice is not new to India and taxi aggregators are certainly not the first ones to use it.
The most common and widely-accepted example of surge pricing in India is in the aviation sector.
Airfares are often determined by supply and demand on a particular route during a given hour. On Feb. 21, for instance, when the Delhi-Chandigarh highway was blocked by protesting members of the Jat community, airfares between the two cities skyrocketed to around Rs99,000 for a few hours during the day.
Even as the government keeps a tab on any such unusual spurt, surge pricing has not been banned in aviation. So, the Karnataka government’s move has come as a bit of a surprise.
Karnataka’s transport minister Ramalinga Reddy told The Economic Times that the state had taken the decision to ensure competitive fares between online and offline taxi players.
But some see this as an attempt to meddle in an area that the government does not entirely understand.
“I think the (Karnataka government’s) policy is misdirected. Surge pricing is not an exploitative pricing mechanism. It can be beneficial for the whole system,” said Kartik Hosanagar, professor at the University of Pennsylvania’s Wharton School.
Peak pricing dissuades those for whom the trip is not urgent from making it, and helps “smooth out demand and ensures a better match between supply and demand,” explained Hosanagar, whose research work focuses on the digital economy.
“Overall, I think governments should be careful about getting into things they don’t understand. If other governments follow suit, this could hurt a very effective mechanism for matching supply and demand and also lead to higher prices during non-peak hours.”
But some believe there is a need for more transparency in the system.
A surge price of three-to-four times the normal during office hours in Bengaluru, Delhi or Mumbai is not uncommon. But surge pricing is often not limited to the typical peak traveling hours.
In January this year, a Bengaluru resident was reportedly charged three times the normal for a ride to the airport at 5:15 am—typically not a busy traffic hour. The passenger paid Rs2,767 ($41.6) for the 50-kilometer journey—an average of over Rs55 per kilometer.
“Who knows how these companies are arriving at surge pricing? They need to tell the government clearly about the mechanics behind how surge pricing is calculated on their platforms,” said Sanchit Vir Gogia, chief analyst at research and advisory firm, Greyhound Research. “How do we know if their practices are fair and true?”
The Karnataka government’s decision, Gogia added, will help “establish a strong foundation for ride-hailing businesses in the long run.”