A Triple-Fault on Taxi Fares
The problem is not surge pricing. It’s the absence of a trusted arbitrator of fair prices, the lack of a consensus-building process, and the idea that you can fix taxi / auto fares in isolation in the first place.
Karnataka is the latest in a long line of jurisdictions to try to regulate taxi fares — at least in part, it seems, to clamp down on surge pricing by ride hailing apps like Uber.
This is not a new problem. Like the Olympics, rate card revision and surge pricing debates roll around every few years. Where a tennis player at the Olympics might occasionally serve a double fault, authorities in Bengaluru have outdone them, with an unprecedented triple fault on taxi fares: the wrong solution (built on an incorrect understanding of the market and its failures), arrived at by the wrong method, that addresses — at best— a minor part of the problem.
The Problem: Information Asymmetry
In the auto & taxi market (or for fellow lawyers, the contract carriage market), the most important market failure is what economists call “information asymmetry”: one party to the transaction knows something the other party doesn’t, and that knowledge is relevant to deciding a fair price. The party that has private knowledge can exploit it to transact at a price the other party would not accept if they had this knowledge as well.
Think about your daily commute. You have a good sense of all relevant variables — distance, traffic, weather, road conditions, etc. When a driver asks a ridiculous price, you walk away.
Maybe they explain that a main intersection was just dug up, requiring a long detour; you do the math in your head and quote a new price. Or maybe you are running late, and decide the extortion is tolerable given the time you’ll save. (Then you get stuck in traffic anyway, and are grumpy all day / week / year.)
Point being, the meter and rate card are redundant: when both parties to the transaction have near-perfect knowledge, no third-party arbitrator of prices is needed.
Now think about when you just landed up in a new city. There are myriad ways in which you will get fleeced. You don’t even speak the local language well enough to argue! Fixing this kind of information asymmetry is genuinely difficult. Best if a local friend comes and picks you up.
The Textbook Solution: Fiduciaries
The textbook solution to this kind of market failure is, in fact, to force the party with superior knowledge to be your ‘friend’. In legal terms, this is called a ‘fiduciary duty’ or ‘fiduciary obligation’. For instance, doctors, lawyers, and financial advisors are legally obliged to act in their clients’ best interests, or risk losing their license.
In practice, enforcing this solution is not easy. Medical malpractice is a complicated field for patients, doctors, lawyers, and insurers. Finding judges or judicial bodies with the right mix of expertise is a serious challenge. Even assuming fewer than 3-sigma (0.1% of cases) go to dispute resolution, since way more people take autos or cabs every day than go to a doctor, sheer volume makes it hard to imagine this could be done with taxi / auto drivers.
It’s not just the market for transport that has this problem. Think about the last time you bought, sold, or leased property. Did you go to a broker (or the ironically-named NoBroker dot com)? If so, you paid someone to be the local friend who helps you navigate that market.
Information asymmetry can be devastating in the property market, given the amounts involved, and the difficulty of reversing a transaction or getting a refund. Unsurprisingly, many of the lawsuits slowly winding their way through India’s courts pertain to property transactions.
The classic paper on information asymmetry (George Akerlof) modelled the used car market, where again large sums of money change hands, and decisions are not easily reversed. At least when it comes to cabs and autos, ticket sizes are smaller, and you can stop the cab anytime you want.
Definitely NOT the Solution: Ride-Hailing Apps
Even with those lower stakes, though, ride hailing apps are no solution at all. [Or at least, most of them are not a solution. Beckn protocol-based apps like Namma Yatri might be an interesting exception.]
To understand why ride-hailing apps won’t solve an auto fare problem, we have to first understand what they do, and why they do it. To do that, we have to understand another kind of market failure: “transaction costs”.
In economics, there are primarily two parties to a transaction — a buyer and a seller. The buyer sees value in what the seller is selling. The seller sees value in the buyer’s money (or whatever they’re providing in exchange). For the transaction to take place, though, the buyer and seller have to find each other, agree on a price (for a defined quantity and quality of stuff), and then actually exchange the stuff and the money.
All of these things aren’t automatic or costless. (If they were, as Ronald Coase argued, bargaining to an efficient outcome would be way easier.)
- Finding a buyer or seller involves what are broadly called search or discovery costs.
- Agreeing on a price involves negotiation costs.
- Actually exchanging goods / services and money involves what are variously called enforcement or fulfilment or logistics costs.
- Plus, if there is some disagreement after the transaction, that means dispute resolution / repair costs as well.
When these costs rise (or are perceived to be) higher than the value being derived from the transaction itself, buyers and sellers give up. “We want to transact,” they say, “but it’s too damn hard!” This is what economists call a transaction cost market failure.
A ride-hailing app is, in economic terms, a platform company (or ‘multi-sided market’): one that intermediates between buyers and sellers. Every platform company adds value in the same way: by reducing transaction costs. For example, Uber’s tagline for their Uber Auto category is “no bargaining, doorstep pick-up” [emphasis mine, not in original] — suggesting that the biggest perceived transaction cost when it comes to autos in Bangalore is that of agreeing on a price.
Every platform company theoretically makes money in the same way — by claiming a percentage of the value of the transactions it has enabled. (That percentage has to be smaller than the transaction cost savings it created, or buyers and sellers will give up again — “We want to transact, and this guy wants to help us, but their services are too damn expensive!”)
In fact, Ola in Bangalore has given up on doing even this: their new “popular fare” feature basically means that passengers and drivers are back to negotiating prices. Given this was arguably the most painful part of the transaction costs in the first place — say “one-an-haff” to someone from Bangalore and watch them shudder — it’s pretty amazing that Ola has said they will no longer fix it.
(Prediction: anyone who can will stop using Ola. Unless they reduce their fees / commissions to reflect they are providing lesser value now. They’ve done no such thing, you say? The ‘popular fare’ is pretty much what autos would ask, plus Ola’s commission?)
Platforms (Typically) Make Things Worse
Every platform company, in practice, realises that they have access to a wealth of information that no individual buyer or seller possesses. In other words, a successful platform company doesn’t fix information asymmetries — it exacerbates them dramatically, by concentrating valuable information with the platform company itself. Their business model rapidly changes from solving transaction costs to creating vertically-integrated monopolies. (Don’t take it from me — ask current US FTC Chair Lina Khan.)
Do you know the average price per km of a taxi ride in Bangalore last week? While you or I can guess, someone at Uber can give a precise answer, based on data that only they have access to. Worse, they have granular data on acceptable price ranges for each user, whether passengers or drivers.
The debate on taxi fares should take as its starting point the fact that ride-hailing apps are tools for targeted price discrimination. This makes the idea of a fair price a joke: if your only source of information is the ride-hailing app, you have no idea what a fair price should be in the first place.
The obvious solution is for regulators to compel disclosure of relevant information by the ride aggregator. Until then, every driver and every passenger is at the mercy of the algorithm; surge pricing is, at worst, an added insult.
Introducing a price cap under these circumstances means that everyone will charge at or near the cap, because that is the one piece of widely-shared information. (This played out, for instance, with air tickets when prices were capped during the COVID pandemic.)
Given the nature of the market failure, meters (with periodic fare revisions) are a pragmatic, second-best solution. By making at least some of the relevant information public, they anchor and narrow the range for private bargaining. Widely publicising the fare cards, along with expected fares for some standard / popular routes, would further help reduce the likelihood of unfair pricing.
A Fair Fare (Needs Hard Work)
Rate cards — like most policy interventions — are most effective when drivers and passengers comply with them voluntarily. Simply declaring a new fare structure does nothing to promote compliance.
This is where Karnataka serves up a double-fault.
Imagine that, before announcing any new rates, the government convened representatives of drivers, passengers, and other stakeholders to discuss and arrive at a consensus, invited public comments on that draft, and revised it based on the comments. Imagine that the representatives then presented that process and its outcomes back to their respective constituencies.
To be sure, the process would be slow and painstaking. Decision-making in a deliberative democracy often is. Consider, however, the multiple rewards it could offer.
- The revision process would itself be a form of public education, further eroding the information asymmetry.
- It might bring out legitimate issues that drivers and passengers face. It would provide opportunities for tapping into the creativity and wisdom of the broader populace to come up with innovative solutions.
- And it might sow the seeds of friendships between groups that are otherwise perennially positioned as opponents.
Even if it does none of the above, the rate card arrived at from such an exercise would still have far greater legitimacy than the current diktat. Process legitimacy translates into voluntary compliance. Voluntary compliance means way lower negotiation and enforcement costs.
(An aside for economists: has anyone calculated the deadweight loss of multiple cancelled bookings and the uncertainty this adds to the day? Or of haggling over each leg of the journey, often in the middle of heat / dust / traffic fumes and noise, and the health costs of such stress?)
Triple-Fault: Autos and Taxis are Parts of a (Complex) System
This episode gives us a glimpse into a part of the policy process that usually goes unobserved: the underlying mental model(s) of the policymakers involved. That they believe they can fix taxi fares or surge pricing so easily — simply by declaring price tiers or formulae — is why I describe this decision as a triple-fault.
The most important part of the problem is not vehicle tiers or types, fuel prices, or the per-km rate: the most important part of the problem is that it involves human beings interacting with other human beings, under conditions of imperfect information. Transport-related policies, at their core, are trying to influence people’s decisions. This typically requires aligning the incentives of various stakeholders. How much a taxi charges at a given hour of day is only one input to that decision.
A city is a system, and low taxi availability, high fares, surge pricing, and traffic jams are all symptoms of the same systemic challenge.
What Bengaluru needs is excellent public transport, coupled with planning practices and lifestyle choices that reduce the need for commuting. Capping fares or surge pricing will, in itself, do no more to address these needs than it will to reduce information asymmetry.
To be fair, city and state authorities do not have the luxury of designing a new transport system from scratch. The city already exists (and is growing). Roads, rail lines, and metro lines are all in place (with more being built), and represent significant investments — they cannot be easily scrapped or altered. Terrain (both geographic and social) and budgets constrain what can be done, especially in the short term.
That said, as climate change-induced heat waves and disrupted precipitation patterns become ever more common, it is in the shared interest of all the city’s residents to have systems of roads, drains, housing, power, transport etc. that work well, both normally and during times of stress or disruption.
Arriving at such systems will need a much more holistic view, starting with genuinely understanding how a day in the life of a Bangalorean looks, and how that day might be made more comfortable, less stressful, more productive, and less carbon-intensive. Genuinely fixing the taxi / auto fare problem will take a lot more than issuing a circular. It is one small piece of reimagining and reshaping the city-system as a whole.
