Inefficiencies in the auto rickshaw market and Uber

Taxi marketplaces such as Uber and Ola address inefficiencies and failures in the auto rickshaw / taxi market

Weary after a long cold night journey you get off the overnight bus from Chennai at Lalbagh’s Double Road gate, and look around for auto rickshaws. There are some ten of them around. The drivers are equally weary, having woken up early and left their homes to stand in the cold, hoping to find passengers alighting from buses. They want to get compensated for this, and quote you a fare that includes such compensation. All of them quote similar fares. You grudgingly bargain and agree, and conclude that Bangalore’s auto drivers are bastards.

Alternate scenario: as the bus reached Madivala, ten minutes away from Lalbagh Double Road gate at that time of the morning, you pull out your app and ask for a taxi to pick you up from Double Road gate in ten minutes’ time. The driver has been up, but resting at home. He leaves home now, just in time to be there at Double Road gate by the time you get off there. Off you get into the car and go.

You have to get to work and try catching an auto rickshaw. The guy asks for extra money for he has to take you through traffic-laden roads, which are a tax on his time, which the regulated fare doesn’t compensate him for. You bargain, get in, and conclude that auto drivers are bastards.

In an alternate scenario, you use an app-based taxi which calculates the fare as a linear combination of distance travelled and time taken, which means that the driver gets compensated for getting stuck in traffic without having to bargain for it. And without you having to think that the driver is a bastard.

In the evening you are trying to get an auto rickshaw from MG Road, and the guy asks for a premium. This premium is not reflective of costs, but the fact that demand for auto rickshaws in that area at that time is high, and that there will be customers willing to pay that premium. You conclude that the auto rickshaw driver is a bastard. Uber’s surge pricing (which can be steep at times) doesn’t evoke the same reaction from you. Uber has centralised knowledge of demand and supply so they can clear prices better, while the auto driver, lacking that knowledge, quotes a price that reflects his lack of market knowledge. And not having a good idea of what to charge, he might try to charge above market price.

What I’m trying to say here is that the local taxi/auto rickshaw market is inefficient, and ridden with failures. There is lack of information flow between demand and supply, which leads to inferior price negotiation, and the transaction cost of time and effort wasted on negotiation as opposed to using that time to travel! And when a market fails, the classic economic response is regulation, but in the case of taxi markets regulation is so poor (regulated prices do not reflect costs) that it enhances the market failure. The (badly) regulated prices anchor into people’s minds unrealistic expectations, and when auto drivers nudge them towards more realistic market prices, passengers assume that they (drivers) are bastards.

It is in this context that players like Uber and Ola (I’m not a fan of Ola’s pricing model, though) step in and try to resolve the market failure by improving flow of demand-supply information and setting “clearing prices” that compensate the driver in line with his costs. If you look closely, these companies are actually rescuing the local taxi market from its inherent inefficiencies and failures and bad regulation!

It is important, however, that no one market place ends up becoming a monopoly. As long as we have two or three different marketplaces, both customers and drivers have the choice of moving between one and the other, and this will ensure that these market places face market pressures from the two sides of the market, and if they “regulate” in an unfair manner, their participants will move to a competing marketplace, resulting in loss of business for the marketplace.

But then, considering the inherent network effects of the marketplace model, I don’t know how we can ensure that competition exists!