Surge Pricing can Stimulate Supply

All these years when I sat in a kaali-peeli and the driver refused to drive me to my destination, little did I realise that what the cab driver was secretly demanding of me was Surge Pricing. But then of course I hadn’t heard of the word.  I just got very angry and proceeded to look for another cab which I could never find.  And then I angrily walked home large distances feeling helpless and angry with the entire cab industry.

Unless I had that friend of mine with the deep baritone voice sitting with me. When the cabbie refused to go to the destination, my friend would quietly tell him to go to the nearest police station.  Unfortunately since I was denied the deep baritone at birth, I had to no option but to keep feeling angry and miseralble.

If one were to go into the reasons why the kaali-peeli would not take my fare the cabbie is not interested in going in the direction of my destination for several reasons.

a ) He has to finally drop his cab of to the cab owner and this is in a different direction

b ) He finds my destination is not going to give him enough money

c ) If he is a cab owner he lives in a different direction and this is the last ride of the day

d )  He has completed his 8 hour shift for the day and does not want to ply the cab at all.

If I had known about Surge Pricing in the days before Uber perhaps I would have made the cab driver an offer of 2X or 3X he  couldn’t refuse.

So how does Surge Pricing help the Supply of Cabs?

The concept of surge pricing is quite easy to understand from a graphical point of view.  After all  this is classical economics. The demand shortage is needs to be equalised by the supply which naturally means a rise in price.

Unfortunately Uber has made this a black box model by saying they use a surge pricing algorithm.  And algorithms are mysterious and  things that you can’t see immediately raising your suspicion.

In the case of the radio cabs like Uber surge pricing can do the following:

1.  Bring more drivers online to take care of the increased demand.  We may have to assume that these drivers were off the road for whatever reason, and the increased price now becomes a motivation to start plying the cab.

2.  If there is a shortage of cabs in one areas, the surge pricing in that area could drive more cabs to that area satisfying the increased demand in that area

3. Or this is a peak office hour where too many people want to leave a certain area at the same time.

4. Surge pricing has the effect of keeping waiting times low in a given area. When demand is exceeding supply of cabs, customers may have to wait indefinitely for demand and supply to equalise.  Surge pricing by putting more cabs on the road equalises the demand-supply equation.

This for example is a chart of surge pricing for New Years Eve.

The thing about Surge Pricing is that prices tend to tick down in bigger steps than they move up. If one looks at surge pricing from this simplistic point of view it is nothing but classical economics playing out in today’s world through an algorithm and a mobile app.

Take surge pricing away, and you will put me back on the road to the mercy of kaali-peelis who will once again refuse to make me their customer.

Considering the government is not providing enough comfortable public transport as an alternative, citizens like me will be left hanging without an option but to get stranded without a cab.