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Acute shortage of parking space means I usually take an auto rickshaw whenever I have to go to the M G Road area. The usual fare is Rs. 35, so when the meter shows Rs. 45 (as it did last week), I demand an explanation from the driver. And the last time round, the driver’s explanation was quite interesting.? “You can pay what you think is appropriate, sir. But what to do? There are so many traffic jams nowadays we are forced to tamper with the meter”.

What the driver pointed out is an interesting concept when it comes to pricing something like an autorickshaw ride. The basic concept is that there is not one (fuel, as is generally assumed) resource that gets consumed in ferrying a passenger, but actually two – fuel and the driver’s time! And it is important that both these are taken into consideration while setting fares.

However, what is currently being done (at least in Bangalore – not the case in Mumbai) is that fares are loosely linked to fuel prices, and whenever there is a major hike in fuel prices the auto drivers’ unions demand and get a fare hike. The last increase I remember was maybe a couple of years back, when the fare was set at Rs. 6 per km. To their credit, the regulators (the government) also fixed rates for “waiting time” (I usually don’t make autos wait, so I don’t really know what it is).

Coming back to the problem of two resources, suppose an auto driver works fixed hours. Say 10 hours a day. On an average he travels 20 km every hour, and if his margin is Rs. 2 per km, he makes Rs. 40 an hour, or Rs. 400 a day. Now, suppose the speed of traffic suddenly slows down and our man can do no more than 10 km per hour. His operating profit for the day is effectively cut by half!

This problem, of a “two-dimensional resource” (dimensions here being distance (or fare) and time) is similar to the one that we face in Cargo Revenue Management (where weight and volume of the goods are the dimensions). In the cargo scenario, we work around the problem by taking into account the “density” of the shipment, and having separate fare structures for different ranges of densities. Could we think of a similar solution in the context of auto-rickshaw?

Just to elaborate, the way we deal with this problem in cargo is by fixing a “standard density” (us cargo guys are funny people – we define density as volume/weight! and in the airline context, standard density is usually 6 m^3/kg). Now if the density of the shipment in question is greater than the standard density, it means that it is in a way “heavy on volume”. And the way we deal with them is to charge them based on volume and not on weight. Shipments with density lesser than the standard density are charged based on weight (they are clearly “weight heavy”).

If we want to incorporate this concept in the auto-rickshaw world, the concept analogous to density would be “average speed” – the average number of billable kilometers an autorickshaw runs during an hour. We could pick a “standard” value for this average speed. If the average speed during the time of travel is greater than this standard speed, charge the customer by distance. Else charge by time.

Of course, implementation of such a complex system is not at all feasible so we need to look at simpler options. Mumbai has its unique way of solving this problem – in that the meter runs even when the auto is stationary (provided the engine is running). So in case of slow moving traffic/ traffic jams, the driver is adequately compensated. There are a couple of issues with this system too? – that the driver could deliberately go slow, and that the engine needs to be kept on during jams.

Are there any other simple solutions to this problem? One option could be peak hour rates – at times of the day when traffic moves slower than average (average is quite slow nowadays), auto-rickshaws should be allowed a premium. A premium in order to compensate for the greater strain on the resource that is driver’s time. It would be something like if you get into an auto between 8 and 11 am or 5 and 8 pm you have to pay a 20% premium on the meter fare. Implementation of this could be through fare charts like those they have in Mumbai.

Of course, note that this peak hour premium is very different from night fares. The latter is in place because the supply is low at that time. The former needs to be there to compensate for strain on additional resources in a regulated market!

I’m not saying peak hour premiums is the perfect solutions to this problem (please leave comments with what you think would be a good solution). All I’m trying to say is that the constraints on auto-drivers’ resources need to be carefully noted, and adequately compensated (i’m reminded of some post in the Indian Economy Blog sometime back regarding directional demand for auto-rickshaw traffic). A lot of people might say they are high, but I believe the current auto-rickshaw fares in Bangalore are unrealistically low – creating unrealistic expectations from the consumers on one hand, and encouraging cheating by the auto drivers on the other.

Remember that fair deals are far easier to implement than unfair ones – which take an extraordinary degree of policing. It is hence an expectation that cheating on the part of auto drivers will reduce in case of fair setting of prices. Of course, there will still be nothing to stop the driver from cheating, but in case of a fair deal I believe that policing should become easier which will further reduce possibility of cheating.

Oh, and for the sake of not leaving a story hanging, I paid that auto driver Rs. 35 – what I believed was the “fair” or “normal” price (and btw, it was an off-peak hour ). And he happily accepted it and moved on.

Cross posted at the Indian Economy Blog. Usual rules apply with regards to comments.