There is nothing really wrong with surge pricing, as the prices are market-driven and there is no compulsion to use the service in case one is not satisfied with the fare being charged
Surge pricing is not really new in India, but has gained consumer attention of late due to the controversy surrounding operations of cab aggregation services Uber and Ola. It has been argued that these operators are unfair to both competitors as well as customers. The former are eased out when prices are low, which helps to make such travel a habit for the users. Once in this system, the latter are subjected to higher fares when they need cabs the most, and hence end up paying higher fares.
If one looks back, the Indian Railways has been the pioneer in this business of surge pricing, and the earliest practice which went unnoticed was the concept of Tatkal, where one could do last-minute bookings, which are defined as one day in advance from the date of journey. The rate is 10% of basic fare for lower classes and 30% for higher classes, with upper ceilings being maintained. No one complained about it, as it effectively set up a new queue before the departure date when passengers had a chance of getting a ticket by moving the finger fast. It was targeted at last-minute passengers who did not mind paying a premium for the possibility of travelling on the desired date. Ironically, those who are on the waiting list even after booking in advance several days before travel do not get to be included in the Tatkal scheme. Now, with the Indian Railways officially going to have ‘surge pricing’, which is differential pricing for the Rajdhani, Duronto and Shatabdi fares, it will be universal across dates where every day will make a difference.
Surge pricing is an efficient system where one is able to actually match demand and supply on a real-time basis, which is revealed by the amount that is charged and which is also the fare the customer is willing to pay. For a cab, the consumer can choose not to use these aggregator cabs and stick to a regular one and pay a lower fare. But as long as one keeps paying the surge fare, the provider of service is justified in charging it on grounds of it being determined by market forces. In fact, heavy demand at a time will have potential users getting desperate to board the aggregator cab at any cost, and, hence, demand will always follow supply.
The conundrum here is that while cab operators or the Indian Railways today can decide on these rates, the users are never together to form a group that can counter them by not using the services. Hence, they will never collude to stop such fares, as it is not possible given the numbers involved. The classic economic tenets of Game Theory operate here, where each one works on the basis of their using the service and the other staying out. This leads to a suboptimal solution for users, as everyone appears to be willingly paying higher fares. As a result, collusion never takes place and the service provider benefits.
The Indian Railways, on the other hand, has a monopoly on rail travel, and can actually have surge fares across all classes and trains, which will probably be the logical corollary. The only practical deterrent can be a possible loss in the elections in case they go overboard. This is possible because at the lower level, there is no alternative as sleeper coach travel is the cheapest mode for passengers. For higher classes, the consumer can always weigh the differential between air and rail fares, and to that extent there will be some swapping of travel between these two modes. In fact, a smart game which can be played by the airlines is to price tickets just below the surge fare—which is to be a transparent system that can be caught on by algorithms to improve their passenger load factor.
Now, surge pricing holds in modified forms in various sectors. Airlines charge differential rates for almost each seat, with additional charges for add-ons along the way. Hotels have differential pricing of rooms as one approaches weekends, which have higher prices. Further, anyone trying to book online will notice that once your ‘URL’ is tracked by the hotel, the rate will go up on your second visit to the site when you do the booking. Travel portals buy tickets in advance and keep changing fares continuously to ensure that prices move with time. Also, often when you see a price which appears reasonable, putting in a multiple number for passengers leads to different prices per ticket. The algorithm captures your eagerness and then charges you for the same.
This is open ‘surge pricing’ which is different from ‘covert systems’ that have been there for long—like late-night fares being higher than day-time ones. Telephone rates at one time used to go cheaper for long distance calls (trunk calls) after 11pm—which was a case of reverse surge pricing. It can be differentiated from tickets which sell in the black market at a progressively higher rate for, say, a Pink Floyd concert as the day approaches.
Is there something wrong with surge pricing? The answer is ‘no’, as the prices are market-driven and there is no compulsion to use the service in case one is not satisfied with the fare being charged. When it comes to the Indian Railways, however, there is monopoly power being exercised, especially when it gets applied to lower classes. Those travelling by upper classes may choose to continue to pay the higher fare because they do not mind it or could switch to air travel if the economics makes more sense.
Surge pricing is here to stay, and as providers of services work towards bettering their revenue, charging differential prices is a way out as long as there are willing users. It has already been in existence in the system for a quite a long time now, though it has become noticeable of late. The Indian Railways venturing into this territory could be a desperate attempt to earn higher revenue in a different way, and the current experiment with higher classes will soon trickle down. That is the truth.
The author is chief economist, CARE Ratings. Views are personal