India's Price Ceiling On Uber Rides Hurts Riders, Drivers And

The Economy
Co-authored by Jon Hartley and Nawaphon Sittisawassakul

Recent regulatory blowback against Uber, Lyft and other ridesharing services around the world
have reignited the ongoing regulatory policy debate surrounding the ride service in India, Uber’s
second biggest market in terms of cities where it operates. Most prominently, India’s government
recently enacted legislation that allows major cities to arbitrarily set limits how much ride service
companies such as Uber can charge riders during peak times.

As surge pricing often results in fares above the new price ceilings set by the Indian government
resulting in supply-demand problems, a potential shortage of rides problem now arises during
times of peak demand. Meanwhile, opponents against surge pricing in India argue that the fare
price ceiling helps to maintain competitive fares for current cab drivers.

Price ceilings on Uber fares will create shortages of available drivers, longer wait
times and deadweight loss 

If India really cared for its drivers and riders, it would remove the price ceiling for surge pricing
during peak times in order for the supply-demand of rides to reach what economists call an
equilibrium. There are examples throughout history that when a government sets these sort of
price controls on goods, it interferes with the natural supply and demand equilibrium price and
amount of those goods, creating shortages and surpluses. For example, long lines formed at gas
stations during the 1970s when the U.S. government put a price ceiling on gasoline, stopping the
price from going high enough to reach the equilibrium market clearing price between consumers
and producers, creating a shortage. Consumers were incentivized to consume more of the good
than they would have consumed under normal market conditions and producers were
incentivized to produce less of the good because they couldn’t sell at a price high enough to
recoup costs and make profits.

India’s current price ceiling and the predictable shortages for rides during peak times is bad for
both the riders, drivers, society, and leads to a deadweight loss because of the misallocation of
time, money, human capital and human potential.

New academic research highlights how surge pricing is necessary to prevent

shortages of Uber rides

A new paper by researchers at the University of Chicago Booth School of Business the economics
of Uber’s surge pricing demonstrates that in the absence of surge pricing at peak times wait times
for rides increased from the average of less than three minutes for those willing to pay the surge
pricing, to over fifteen minutes across the board.

The graphs below illustrate Uber’s surge pricing mechanism behind incentivizing more drivers to
come out during peak times, and what happens when this mechanism fails, in order to have a
constant and ready supply of drivers for riders willing to pay. Based on the first graph, we can see
that Uber incentivizes its drivers with a price high enough for them to outnumber ride requests
most of the time. This helps to make sure the supply of drivers is ready for riders at any given
time and keeps the riders happy. In the second graph, the Booth School paper talked about how
because of the surge price outage, the price of a ride couldn’t go high enough to signal to Uber
drivers to come out, thus resulting in longer wait times.

This graph shows the supply and demand of Uber rides during a busy night where those willing
to pay... [+]

This graph shows an outage in Uber’s surge pricing mechanism on a busy night where the wait
time... [+]

In the case of India, because the signal of the higher surge price isn’t there under the price ceiling
and because the drivers’ opportunity costs of going out and driving around are higher than the
money they hope to make, they aren’t willing to come out to pick up those who value the ride
more and who would be willing to pay higher than the price ceiling. This is money that the driver
would otherwise be making if there were no price ceiling and it thus leads to less producer
surplus because the driver isn’t producing the ride. It also leads to a decrease in consumer
surplus because those who want rides and are willing to pay the higher prices can’t get rides. This
decrease of consumer and producer surplus leads to deadweight loss, which is economically
inefficient.

How India's Uber price ceiling could widen a mismatch of demand and supply for
rides

To give an idea of the supply of and demand gap for rides in India, Mumbai has only has a third
of the amount of taxis as New York despite having four times the population. Because India’s
price ceiling doesn’t incentivize as many drivers to come out at peak times as would be needed for
the market to clear, people are left hailing rides longer than necessary. This wastes time that they
could be using to be more productive, used to build human capital, or put more of their time
toward other projects. A recent Washington Post article hypothesized that the amount of time
people waste while waiting in commutes in just the U.S. in one year alone could have been used
to build hundreds of the pyramids of Giza. Imagine what India can do with all of that human
potential being put to better use and all the private and public projects they can accomplish.

Furthermore, if someone is in a hurry or valued their time more by being somewhere else, say
somewhere where they are more productive, and is wiling to pay to get there but can’t get there
because there aren’t enough rides during peak times, this leads to a misallocation of human
resources to their most preferred ends.

In 2015, India was the second most populated country in the world and was Uber’s second
biggest market. That is why repealing the price ceiling is so important for both India and for the
ride-hailing industry there. In order for India’s economy to move forward and compete on a
global scale, they must aim for legislation that will allow resources like their citizens’ time,
money, human capital, and human potential to go toward to their most preferred and efficient
uses in order to maximize their country’s utility so they can progress.