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A few days ago, I decided to go watch a movie.
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There was a lot of traffic outside and I didn't feel like driving.
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It's normally quite cheap but this was rush hour and the price that was quoted was three
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times the normal price.
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Three times I was outraged.
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I thought this is robbery.
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These greedy capitalists are exploiting me.
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The government should step in and ban search pricing.
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I cancelled my trip and decided to watch something on Netflix instead.
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Just as I switched the app on, a brilliant idea came to my mind.
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Why should the government ban only search pricing by Uber?
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It should ban all high prices.
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There are so many things I don't have the money to buy, luxuries I can't afford.
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The government should fix the price of everything.
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Mercedes cars should be available for one lakh, four bedroom flats in Bandra should
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be available for two lakhs, food in five star hotels should be free.
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We could all live the good life.
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Welcome to the Seen and the Unseen, our weekly podcast on economics, politics and behavioral
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Please welcome your host, Amit Varma.
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Welcome to the Seen and the Unseen.
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Today's show is about banning search pricing in Uber.
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The scene effect, no high prices.
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The unseen effect, no cabs.
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Price controls always lead to shortages.
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My guest on the show today is Kartik Shashidhar, an economist and writer now based in London,
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who enlightened me in the last episode of the Seen and the Unseen on how football transfers
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His first book, Between the Buyer and the Seller, will be released later this week and
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I recommend you pre-order it on Amazon right away.
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Between the Buyer and the Seller is a book about markets.
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It evaluates markets from the point of view of how liquid they are and it looks at different
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One of his chapters is about how Uber disrupted the taxi market, making it far more liquid
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and thereby helping both consumers and drivers.
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I'd like to talk about that a bit before I get to the subject of search pricing.
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Kartik, welcome to the show.
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Hi Amit, good to be back here.
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So Kartik, last week we spoke about liquid and illiquid markets in the context of football
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transfers and first you define liquid markets as markets where buyers and sellers find each
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There's no transaction cost and there are so many of them that you can arrive at a good
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You can gauge the supply and demand and arrive at a reasonable price very easily.
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The example of that being computerized stock exchange and equally an illiquid market is
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where this is much harder to do.
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For example, the football market where there are few buyers and sellers and all kinds of
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circumstantial factors pop up and every player is unique and not a commodity that you can
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easily find a price for him.
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And the assumption often when we talk about these things is that this is just the nature
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of the market, that a liquid market is going to be liquid and an illiquid market is going
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to be illiquid and there's not much that can be done about it.
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But in your book you have an entire chapter about a market which was fairly illiquid and
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which has become far more liquid in recent years.
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I'm talking about Uber obviously and its dynamic pricing.
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Can you shed more light on that?
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How did that illiquid market become much more liquid?
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So I think it was about three years back I think I gave a talk at the Goa project where
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I spoke about how auto rickshaw and taxi markets can never be liquid, about how they can never
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The premise of my talk was that I examined regulation of auto rickshaw and taxi markets
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in different countries and cities and said that each of them has a particular problem
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because the way the costs are defined is so complex that no regulation can possibly capture
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all of them and so it's almost impossible to regulate and become efficient and all that.
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And at the same time that is when Uber was really taking off and it had taken its first
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steps in India and then Ola was also kind of coming up and so in about a year's time
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that talk that I gave in Goa became invalid because here you had a market which had once
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been extremely illiquid but had suddenly become far more liquid just because of exchanging
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superior information and a lot of this superior information exchange happened because they
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introduced the price and dynamic pricing into the mix.
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And just to give a sense of what the market has traditionally been like especially in
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cities like Mumbai and Delhi where I've lived is that black and yellow taxis and auto rickshaws
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are licensed by the government, limited licenses are given out which sell at a premium and
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therefore what happens is that the supply is artificially constrained.
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Now when you artificially constrain the supply, demand will inevitably overtake it and there
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So typically no one is really willing to, for example in Delhi no auto rickshaw guy
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will go by the meter, you have to negotiate which is fair enough but even that negotiation
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or any interaction between the buyer and the seller happens in a state of deeply imperfect
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information because neither has an idea of what the supply and demand situation is.
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The guy trying to hail an auto rickshaw won't know if there's another auto rickshaw around
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the corner or if there are five more street away and ditto for the auto rickshaw guy who
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doesn't know how many consumers would potentially want his services and Uber's technology and
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dynamic pricing takes care of the information problem, takes care of the matching supply
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and demand problem and completely changes everything.
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Yeah, so I think the way the markets are regulated in Mumbai and Delhi are not very different
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from the way they are regulated in let's say New York and London.
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The traditional view of regulators has been like let us give out a limited number of licenses
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and then impose certain rules on how these licenses are to be used which basically implies
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this is the price you can charge, this is how the price is going to be calculated and
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you can work for so many hours a day and depending on the jurisdiction to jurisdiction these
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things change but that's how these markets have been regulated.
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But obviously the regulators can't have a constant, so the first problem that comes
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with this is the demand supply thing because the number of licenses is capped and doesn't
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necessarily increase with time, very soon you have a demand supply imbalance where regulation
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is well enforced such as New York, it just becomes a case of fastest finger first, whoever
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manages to get to the taxi first gets the taxi, where regulation is poorly enforced
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like in Chennai, it becomes a case of negotiations, whoever can pay the most for the ride will
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So in that sense it's a good market in Chennai where because of the regulations you have
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a negotiation and the price mechanism for allocating the auto rickshaws but the problem
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is that there's no information and there's no information exchange.
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So if I were to and in the last episode I spoke about how in the football market because
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there's no good valuation mechanism the bid and ask can be very far and from my personal
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experience in places like Chennai I mean that they are fairly far like you typically start
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bargaining at half the rate that the driver courts you and so on which is absolutely ridiculous
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because like typically taxi markets you know there's a particular, there is a reasonable
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distance estimate, time estimate and so on so you should have a good idea of what it
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should cost but because you don't know what the competitive landscape is like you end
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up like trying to bargain fairly aggressively and so on.
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So once you have a central aggregator who comes in, so this is the other theme that
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I talk about in the book is that like a lot of people demonize middlemen, they say that
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like middlemen add no value and so on and Uber, Ola etc are nothing but middlemen who
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try to connect drivers and passengers.
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What the middleman does in this case is to kind of enable transformation of information.
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He gets data on who is trying to travel from where to where at what point in time and then
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like kind of transmits this data to all other users in the form of a price mechanism.
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So that's how they manage to kind of while it might still be demand and supply it's still
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like kind of it's a much more informed, church price is a much more informed multiple than
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like the bargain you have with your auto picture right.
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And that informational aspect is a key part of dynamic pricing for example when prices
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go up they typically they'll do two things, one is they'll incentivize idle drivers to
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come out in the market because you know they know that there's more money to be made and
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equally if someone wants to use the Uber for a very trivial purpose he might choose to
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just stay home or he might choose to take public transport but if someone needs it for
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an urgent purpose like going to the catching a flight or going to the hospital you know
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they'd gladly pay the higher price which is a true reflection of supply and demand.
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So that kind of gets me to the crux of this episode.
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What I want to really ask you about is in India we've often had outrage at prices rising
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at times of high demand which of course they are bound to do in this dynamic system and
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in some places you know like Karnataka banned Uber search pricing at one point and Delhi
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experimented with banning it.
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Now the scene effects of this obviously is that the customer doesn't pay more than whatever
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What are the unseen effects?
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Okay so first of all I mean let's distinguish between a capped price and banning dynamic
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I think the two are completely different things so we'll come to that in a little bit.
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So I think what the regulators try to do is to completely ban dynamic pricing at all.
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They say that you need to have a particular fixed formula for pricing and charge customers
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Scene effect is that okay maybe this is going to keep the prices low but the order one unseen
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effect is that because it's going to jack up the average price so if the earlier price
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was let's say 10 rupees I'm just throwing the random number now the average price will
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be 15 rupees because you can't jack up from 10 to 20 when you want now and so on.
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So instead of charging 10 rupees all the time you end up charging 15 rupees all the time
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so the average price ends up going up.
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So that's the first order unseen effect.
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Second order unseen effect is that like it leads to poor allocation in terms of you end
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up allocating the rights to the people who ask for it first or who are lucky enough to
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be where they were when they asked for it and so on rather than to the people who need
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It's first come first serve.
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It's a first come first serve.
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And then the other thing is that like I mean yeah there's no because these guys are function
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as marketplaces where like the suppliers are also like kind of independent people and not
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What happens is that when you kind of but banned dynamic pricing there's no information
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to the suppliers as well in terms of when their services are needed the most.
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So you might happen that like for example there might be a particular Sunday when all
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Uber drivers decide to take off for whatever reason and how do you and that will lead to
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like insane shortages because like you can't use price to ration out whatever cabs you
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have and there's no way for you to get get any of these guys who are like enjoying their
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Sunday to come out and drive for you.
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But if you have dynamic pricing then on the one hand like on a particularly busy Sunday
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whatever cabs are available get allocated to the people who need it the most one.
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And second one is that like I mean because the prices are higher the drivers who value
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their Sundays less than the others are actually going to come out and drive because they know
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there's some good money to be made.
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And there's been some research by the way some Uber is already eight years old and there's
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been enough research on whether dynamic pricing actually leads to a change in supply or if
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it's just a change in demand and so on.
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So one very interesting piece of research has been done by a bunch of guys from Northeastern
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And what they found is that high surge prices may not necessarily bring new drivers into
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the market as in people who are sitting at home don't automatically see oh it's two
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eggs let me go take a car out and drive.
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But what it does is to whatever cars are there in a city they get allocated in a better manner.
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So let's say I'm in Bandra I'm an Uber driver I'm in Bandra and I see that and I'm not
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getting a ride for five minutes I've waited without getting a ride.
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Now I see that in Malad the surge multiple right now is 1.5x.
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I immediately know where to go to find my next ride because I know that and this is
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by the way this Uber shares this as a heat map with all its drivers.
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So I know that like there is a demand supply imbalance in Malad and if I go there I would
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not even I'll not only get a passenger but I'll also get a passenger who will be willing
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So it allocates the existing supply in a much much superior manner.
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And also is it fair to say that beyond the immediate short term impact of let's say at
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five o'clock on a Friday evening in rush hour you know existing drivers are incentivized
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to go out for a ride because the price is higher but also in a broader sort of framework
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if Uber drivers because of this because the services are valued you know get what they
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are valued more efficiently if they actually start making more money on a monthly basis
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or whatever you might have people in other professions saying hey maybe I should go for
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And that can also help fill the sort of supply gap a little bit because say a night watchman
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who's earning 10,000 a month might see his friend who's an Uber driver earning 20,000
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and he makes a shift which kind of also helps imbalance.
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Oh yes and I think this has definitely been happening in India over the last couple of
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years especially I think in order to build out their market what Uber did was to they
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gave out pretty good incentives to get drivers on board for a while.
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And so and that's got a lot of people to move from other professions to get driving for
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And so and also like a lot of these guys are part time they don't like I have met quite
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a few drivers who they have contracts with these big taxi companies who lend out cars
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to car tricks but that they only spend about two days a week doing that because that's
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the amount of work they get.
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The other time they ride Uber they let out their cars for Uber and so on.
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So it's a so because of this whole contracting model because they don't have employees and
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so on it makes it extremely flexible and it makes it extremely makes the market far more
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Far more efficient people are much more productive with their time the buyers benefit the sellers
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So let me try and sum up what you mentioned as the unseen effects of banning search pricing
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Number one the average price tends to go up.
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So where your basic beginner's price might be 50 you know the system allows for the fact
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that the pricing will be fixed and it's instead 75 and people who would otherwise have got
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a ride at 50 at non-peak hours will have to pay 75 anyway.
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Number two is in the short term they lead to shortages because whenever demand outstrips
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supply for example if there are 200 customers who are waiting for 50 taxis it will inevitably
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be first come first serve or as you said fastest finger first and the first 50 guys get it
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and the rest are left stranded no matter how important their need is whether they need
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to go to the airport to catch a flight or take a relative to the hospital.
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The third effect is that banning search pricing prevents information about the demand supply
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shortfall from getting out in the market in an efficient way.
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So drivers when there's a shortfall of drivers 200 people 150 cars a dynamic price system
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would have kept a higher price and incentivize more drivers to go out there equally it would
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have incentivized some people who wanted taxis to instead take public transport or just stay
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at home if their need wasn't urgent and that information doesn't get out anymore and number
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four it perpetuates the system of shortages because this information isn't getting out.
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So those typical demand supply shortfalls will always remain.
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Absolutely and this is one other thing that because that dynamic pricing kind of helps
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basically in terms of keeping drivers in the market so what happens is that like now when
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you have fixed prices the demand supply equation turns around rapidly through the day.
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So during the morning tea cars when people are need the rights to go to work to school
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and all that like you have massive demand shortage of supply and then through the day
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let's say beyond the morning office hours until the evening office school hours or office
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hours there's very little demand.
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So what happens in that case is that like kind of you have people switching off you
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have people kind of going off the roads people you figure out that you're anyway not going
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to get too many rights in this period so you might as well not drive the taxis and so on
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so because of that what happens is like the liquidity goes down in these periods because
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the demand is low the supply also contracts and like it becomes illiquid.
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What dynamic pricing allows is that like it says it's okay I know that there aren't so
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many people asking for a ride right now why don't you drive at a lower price anyway you're
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out on the road anyway your opportunity cost of doing the next ride now is going to be
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lower than it was in the morning.
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So why don't you just accept a lower price and ride now and the lower price also means
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that like more people are willing to kind of travel then and so on so I think it massively
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improves the utilization of the taxis and of the drivers dynamic pricing and that's
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one effect which is a it's a kind of an end order effect which is a little hard to see
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but I think that's that's where I think these guys are really kind of improving the market.
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So now I want to move on to you know from the economics of it to a sort of a political
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economy question like typically we find that interest groups which ask for search pricing
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to be banned or which you know want legislation against Uber and Ola are typically the entrenched
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people in the business like the black and yellow guys or the unions of the auto rickshaw
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guys who realize that they are getting hurt by all this because if an Uber is cheaper
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than an auto rickshaw and much more convenient than a black and yellow why should you take
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So it's easy to paint them as villains but at the same time they also have a legitimate
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point when they say that they are victims of bad regulation because in the first place
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the government put them in that mess by constraining the supply and they often had to pay a lot
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just to get that license for example a New York medallion at one point was prohibitively
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expensive and the idea was a guy would earn it back over the period of years and then
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suddenly up comes Uber and you know the demand for the regular taxis has gone down greatly.
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So how do we sort of reconcile all these issues.
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Yeah so it's a very legitimate kind of a claim that these guys are victims of bad regulation
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because I mean they got into those professions because they were told it's a the number of
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licenses is capped then you can earn so much and so on.
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So I think in terms of this rate what I would prefer is more of a kind of what I call is
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a continuous solution rather than a discrete solution.
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I think the best example of where I have seen a penalty against Uber and Ola which kind
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of possibly favors these incumbent guys but doesn't like really eliminate the new guys
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is in the Mumbai Airport domestic terminal.
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The last time I traveled to Mumbai was about a year back so things might have changed since
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then but what I saw was this like if you are an Uber or an Ola who's looking to pick up
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a passenger from the Mumbai domestic terminal you need to pay a surcharge you need to pay
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a kind of a short term parking fee of a hundred rupees or something like that so that pushes
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up the cost of taking one of these things so it's like okay I know you are disrupting
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the market so you pay us a part of that as our rent which we will distribute to the incumbent
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so that the disruption is kind of yielded and so on.
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So I think that is a significantly superior solution compared to earlier efforts where
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like they decided to either ban these guys from the airport or say that you really want
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to put a price floor you can't charge less than this and so on.
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So I think something like this where like you have a kind of a you tax these guys you
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tax these guys use a part of their tax proceeds to kind of ease the transition from the old
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regime to the new regime but I mean it takes a tremendous political will to do this.
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And also the example you gave I mean that airport thing is still on by the way I think
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they have to pay a hundred and ten bucks to enter but then that is a case of a limited
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space which is the airport which is charging an access fee which it is within its rights
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to do and whatever but those kind of things it strikes me just thinking aloud that if
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you expanded over a city and you tax Uber and you sort of subsidize the other guys and
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you ease the transition a those taxes slash subsidies tend to become permanent over time
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because you know regulation always moves in the direction of more regulation not less
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regulation and that might one could argue defeat the purpose a little bit because if
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you had an illiquid market which has suddenly been made liquid by this new technology why
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restrict the liquidity in the market through this kind of a measure.
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No I completely agree that this kind of stuff this doesn't restrict the liquidity this slightly
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reduces the liquidity I think what happens is like I mean if you have this so I'm not
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offering it as a solution I'm not offering I'm not saying this is what it needs to be
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done but what I'm saying is if you are thinking of the solution as a ban this is a much superior
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way to do it than a ban as in it's better than what the solutions that are being proposed
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now are things like ban things like you can't have surge pricing and it's quite crazy if
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you are an Uber driver right now I mean like because regulation is so easy you don't know
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when you might be stopped and a cop might decide to take away your car and so on it's
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like completely unfair to these guys how things are being regulated right now so I mean like
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yeah so having some kind of a basic regulation is great but yeah it's basically in terms
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of like not as in having the regulation is great because like you will at least know
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when a cop can stop you and when he can't stop you and so on at the very least but like
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it's kind of you don't want to I completely agree with you that like regulation always
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moves increasing over time and so on so but yeah so in that sense like a ban is like the
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outright the worst option.
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At a practical level I completely agree with you and it's kind of tragic that companies
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like Uber are not just in the business of business but they also have to be in the business
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of politics because in every local jurisdiction they have to face different kinds of restrictions
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aimed at them and I think one thing that one measure we should certainly take immediately
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to make life easier for the auto guys and the taxi guys who have been hit is remove
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the regulations on them remove the sort of licensing constraints remove the pricing constraints
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and let them figure out mechanisms to you know join the liquid market or be part of
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their own kind of liquid market with their own apps or whatever but remove those restrictions
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because right now it's really not a level playing field and the solution for that is
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not to make it less level for the Ubers and Ola's of the world and put the same restrictions
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on them but the solution for that is to make it equally free for everybody because that
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is how both buyers and sellers benefit.
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So I completely agree with you I think there are some markets every time you have some
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controversy with Uber or something you have talks of a taxi union which says that okay
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we are going to get our own app developed so that we can do something similar but unfortunately
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the problem with them is that they have like price caps price flows everything there's
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like way too much control on their lives that they can't do any of this thing I mean it
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would be great I mean think of it right I mean there's no reason why the government
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should be setting price flows like on something like this if you if you can have a I mean
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again this is a second best solution this is not the ideal solution the ideal solution
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would be to not have any regulation but I'm talking about like basically if you really
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want to regulate this thing what do you do is say have a price cap on these guys and
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then say like okay you're free to charge anywhere up to this they can form their own each union
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can have their own app for all you care and they can have the so rather than just having
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Uber and Ola I'm a little uncomfortable with the duopoly right now you'll have like more
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players because like and so on so it's like a there are definitely significantly better
#
ways to make this market more efficient.
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Awesome Karthik thanks so much for coming on the show and I hope everyone buys your
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book and learns from it.
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You're welcome thanks Amit.
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If you enjoyed listening to Karthik's insights do hop over to Amazon or your nearest bookstore
#
and pick up his book between the buyer and the seller.
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You can follow him on Twitter at Karthik S K A R T H I K S.
#
You can follow me at Amit Verma A M I T V A R M A and if you enjoyed the scene in the
#
unseen all our archives are available at scene unseen dot I N. See you next week.
#
If you enjoyed listening to the scene in the unseen check out another great show by IVM
#
podcast made in India hosted by my friend May Thomas where every week she profiles up
#
and coming independent Indian bands.
#
Excuse me bhaiya excuse me.
#
Menu mein scene unseen hai, podcast hai, on course hai, Cyrus says hai, made in India,
#
rediscovery project, empowering series, sex wax hai, IVM likes hai, simplified hai, keeping
#
it queer hai, Tings and Destinations hai, My Neighbor Zuckerberg hai, or The Fun Garage
#
hai, aapko kya chahi hai?
#
Ek baar repeat karte hain kya?
#
Repeat repeat nahi karta hain, aap jaao IVM Podcast dot com pe aur suno yeh sab.
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Yaafi download karoon ka app, sab aapke ungliye ho pe.
