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Surge pricing: Outright ban 'counterproductive', tricky to set a cap, say experts

Surge pricing: Outright ban 'counterproductive', tricky to set a cap, say experts

A row of taxis in Chinatown in May 2020. (File photo: iStock/redonion1515)

SINGAPORE: If you used an app to hail a ride within the past few weeks, you would likely have noticed a rise in fares.

At the start of May, CNA spoke to several regular Grab users. Many said there have been "crazy" price hikes on the ride-hailing app in recent weeks, especially during peak hours. Some of these fares had more than doubled. 

A Grab spokesperson said that the company adopts a "dynamic pricing model" to ensure passengers get a ride when they need one and drivers are compensated fairly for their time and effort.

"When there are more people booking a ride than the number of drivers available in an area, fares will surge or go up to encourage more drivers to head to where passengers are," said Grab. 

But the shortage of drivers is an industry-wide trend, it said. Grab previously told CNA that some drivers became "inactive" due to a lack of passengers over the last two years of the pandemic. 

To address this, the company has rolled out various incentives, such as a driver referral programme and a "co-pilot" programme, where a more experienced driver is paired with a new driver. 

"We recognise there should be a reasonable upper limit in terms of fares charged to passengers and are continually working to keep fares within an acceptable threshold." 

CONCEPT OF SURGE PRICING NOT NEW

Surge pricing is not a new market practice, transport analysts noted.

Almost everyone who uses a transport app today in Singapore would have been introduced to surge pricing when Grab and Uber first entered the market in Singapore, said Associate Professor Walter Theseira, who teaches economics at the Singapore University of Social Sciences.

What causes public concern is when the perception is that surge prices are "unreasonably high", he said.

"What makes the market quite different now is that while demand has recovered strongly for commuting and travel, the supply of taxi drivers and private-hire vehicles remains quite low. And after quite a long period of time when it was basically a commuter's market when demand was low, now there is too little supply to meet demand."

Today's situation is "totally reversed" from several years ago when there were "a multitude of apps" for ride-sharing, added Associate Professor Raymond Ong, from the Department of Civil and Environmental Engineering at the National University of Singapore. 

"Primarily a lot of (the taxis) have gone because of the pandemic, plus (because of) the apps themselves. So in a way, that's why we're expecting such high fares at this point in time," he said. 

"This surge pricing idea is based on the fact that consumers want to pay for the service that they are willing to have. So if I want to leave at such a peak hour, I have to be prepared to pay that kind of price. This is a purely economic approach, unlike a regulated taxi approach."

Surge pricing is also a "choice problem", added Dr Ong. 

"A rational person would logically take something of the lowest price ... So you can see there will be a shift from typical peak hour surge pricing mode to perhaps either a flat fare or meter mode in the taxi. Primarily because it's cheaper," he said. 

"If you're hard for time and you're willing to pay the premium, then you move towards surge pricing."

"COUNTERPRODUCTIVE" TO BAN SURGE PRICING 

But while surge pricing can be a pain to commuters who long for lower fares, banning surge pricing entirely isn't that straightforward.

With taxi fares being deregulated in 1998, Assoc Prof Theseira highlighted that the current issue isn't about whether the Government or transport operators can ban surge pricing. Rather, the issue is "whether (doing so) would be helpful, or would instead be counterproductive and worsen market functioning or create unintended negative consequences".

For instance, measures to make it easier to increase vehicle and driver supply shouldn't come at the expense of safety, even though removing licensing and safety inspection requirements that take time would increase vehicle and driver supply immediately. 

"An outright ban on surge pricing will be counterproductive if the goal is to encourage more sustainable supply to meet the growth in demand", explained Assoc Prof Theseira.

"A ban on surge pricing would prolong the supply shortage for taxis and PHVs, would reduce earnings for drivers and for operators, and would lead to longer waiting time for commuters during peak periods ... Overall, I think the costs would be more than the benefits, because it wouldn't encourage more supply to come online and supply needs to expand to satisfy demand." 

That said, it is "an economically and socially valid question" about whether there should be some regulation of how surge pricing operates, "particularly at the extreme end", added Assoc Prof Theseira.

While the concept of supply and demand is generally accepted, there is a "social responsibility" that suppliers have to "not take undue advantage of extreme circumstances", he said. Ride-hailing companies generally do implement "internal caps" on the maximum surge prices allowed precisely because of social concerns around extreme surge pricing.

"Once surge prices get high enough, arguably, the marginal benefit to efficiency from allowing them to go higher is not very large, since there may be few drivers left who could be incentivised at the margin to provide supply, and few passengers willing to pay those prices. The problem is, at which point would you say that surge pricing has very little net benefit? That's a hard decision to make," said Assoc Prof Theseira. 

As such, he would encourage "regulatory monitoring of surge pricing and practices", but not measures resembling an outright ban.

Similarly, Dr Ong suggested it is possible to set a cap on surge pricing, but determining the cap is the problem.

"Is it going to be 50 per cent of the flat fare, of the normal ride by distance, or something else? ... Is there a potential premium that can be set? If there is a surge price, is it going to be 10, 20, 30, 40 per cent of the taxi by-meter rate?... So this quantum or premium will have to be set, and then the question is how the current operators manage it," he said. 

"But I have to caution that if this premium is set too low, you may find that you don't have a taxi or private-hire car at certain locations or in your vicinity at a certain time. Of course if it's set too high, consumers won't be happy because they're paying a lot. So it's about where to find the sweet spot that is the challenge." 

NOT JUST ABOUT DOLLARS AND CENTS

When it comes to the frustration around surge pricing, the problem boils down to society wanting the point-to-point industry, and taxi and private-hire drivers, to operate as though "they were a social and public service that has the objective of providing a good supply of rides at a reasonable price", said Assoc Prof Theseira.

At the same time, people "want the industry to absorb all the risks from the market". But one cannot have both at the same time, he added. 

"To expect (an increase in supply without surge prices) would be to expect potential taxi and private-hire drivers to want to provide cheap and reliable rides when there may be more lucrative jobs available elsewhere. Taxi and private-hire driving is not a charitable activity and people do not volunteer to do these jobs. So the prices need to be high enough to produce an increase in earnings which will then encourage more drivers into the job."

Addressing the price surge is about valuing the work that drivers do, added Assoc Prof Theseira.

"If Singaporeans believe – as I think they naturally do – that they would work harder in a job or apply for a job if wages were more attractive, and be less inclined to do a job if wages were poor, then why do they expect taxi drivers and private-hire vehicle drivers to behave differently from themselves?" he said. 

"There is also a certain amount of circularity in how we value work socially and what we pay for work. Many jobs have acquired their respectable character in part because they pay very well and not because of anything inherent to the job."

Assoc Prof Theseira doesn't think people will "suddenly respect taxi and private-hire drivers overnight if the fares go up". Instead, the "most practical thing" to get people to respect these professions is to "let the market wages for jobs that perform important services for us as taxi and private-hire driving does rise to reflect the value we place on having a safe and reliable ride", he said. 

"If you want an industry to operate as a social and public service, for example, like our hospitals and public transport services do, then you need to also make a commitment to help reduce risks to the industry. ... (So) in public transport, we subsidise operators when fare revenue is too low to cover costs."

These subsidies have come in the form of income and rental support, for example, over the last two years of the pandemic. 

But with the economy reopening, Grab ensures its drivers continue to "earn a sustainable income" by keeping a close eye on the "macro environment". 

"For example, when fluctuating fuel prices increased our partners’ operating costs, we have rolled out a series of initiatives including a temporary driver fee, fuel discounts and commission rebates to support them," the company said. 

It added that flexible work opportunities are provided for "a diverse group of driver-partners ... to access equitable earning opportunities".

"Apart from our regular transport services, we have continuously invested in and launched services such as GrabAssist, GrabFamily and GrabPet. These services help our partners earn a higher fee for their time and effort, while enabling them to remain relevant to new and growing consumer segments," said the Grab spokesperson. 

"We have also worked with merchant-partners to expand and promote a wide range of delivery services which enable our driver-partners to also benefit from the rapid growth in e-commerce.

SURGE PRICING "LIKELY TO CONTINUE"

At the moment, Dr Ong believes surge pricing is "likely to continue", partly because it gives drivers more incentives to make a living.

"If, let's say, surge pricing is not going to continue, then what next? Then it'll be a purely regulated industry ... So then you'll go back to the pre-ride sharing era, where you start to see people (unable to) find taxis during a certain period of time or at certain locations because it's not profitable," he said.

"We have to think about this surge pricing problem also from the driver's point of view. They're also having a demand and supply problem; they also need to make a living. What is the incentive to go to such (non-profitable) places to pick up customers? ... This would lead to a decline in the overall level of service in this entire private-hire car and taxi industry." 

In the end, resolving the "supply situation" might simply require surge prices and earnings to be "robust enough" that "new drivers get enticed to take up point-to-point driving and existing drivers extend their operating hours or take up part-time driving work", said Assoc Prof Theseira.

The same principle applies to vehicle availability, he added.

"Taxi operators and private-hire vehicle fleet operators increase vehicle supply when there is robust demand for rentals, and that demand is directly driven by whether potential drivers think it is worthwhile to enter driving."

But a longer-term approach for more sustainable living, suggested Dr Ong, is to look at public transport like buses and MRT as a "viable competitor" to the taxi and private-hire car services. 

"From my origin to destination, there are competing choices. It's not just taxi and private-hire cars. There's also bus and MRT. Or if the place is really, really near, there's also walking and cycling. So I will tend to look at this as an entire ecosystem of a journey; where I'm going and why I'm doing certain things," he said.

"And this is where I think the liveability aspect comes in, because liveability has to take care of a multitude of options which consumers would logically choose."

Source: CNA/gy(cy)

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