Tag: ola

Finally some sensible Uber regulation

Ever since Uber launched, regulators worldwide haven’t had a clue as to how to regulate it – it has been such a big disruptor in the taxicab market. Some countries and cities have taken to banning it outright (the list is too long to post links here). Others (such as some states in India) have tried to get Uber to register itself as a “taxicab company”.

The problem with all these regulations is that the Uber model (being replicated by firms such as Ola and TaxiForSure in India) is a fundamental gamechanger. As I have written in this earlier post, the on-demand model propagated by Uber implies that a number of the inefficiencies in the taxicab market don’t exist any more. In this context, trying to regulate it by moving it back to the earlier (extremely inefficient) model is extremely regressive. The right way to regulate is to create a level playing field for taxicab aggregators (which includes Uber) and move the market to a regime where the new technology-enabled efficiencies are made good use of.

And that is precisely what Los Angeles has done. In a rather progressive move (which ought to be copied by other states and cities and countries), the city has decreed that all city-based cab operators need to offer app-based booking services. The interesting bit in the regulation (see link above) is that drivers who fail to install the e-hail app are actually going to be fined.

What this will lead to is that the local taxi market is itself going to become more efficient which should definitely increase both profitability for the local cab industry and also availability of local cabs to the people of LA. What this will also do is to give people of LA a choice between using Uber and the traditional taxi app, which will lead to an improvement in Uber’s service levels. As things stand now I don’t see any downside from this LA regulation.

I hope the model succeeds in LA and other cities see the brilliance of the model and accept the efficiencies brought into the market thanks to this model and adopt similar regulation. I see this kind of regulation coming into the Bangalore market though the backdoor though. Ola already helps match auto rickshaws to customers and now TaxiForSure is also getting into that market. Will this mean that autos won’t have to line up for hours together in front of Lalbagh gate for passengers arriving in the city by bus?

Oh, and LA is not the first city to implement regulations requiring taxis to be “hailable” via an app. When I visited Singapore in November 2013, I found that cabs in the city worked the same way. Locals had an app which they would use to call taxis. The problem there though was that the app was only available to locals (your android/iOS had to be registered in Singapore for you to be able to even install the app), which made it a nightmare for us tourists to move around.

Oh, and while on the topic, a good revenue source for companies such as Ola or TaxiForSure would be to provide the technology backbone to cities that are seeking to use app-based hailing services for their cabs.

 

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!

 

Meru’s pricing strategy

Let’s assume I’m writing this post two weeks back when Uber, Ola and TaxiForSure were still running successfully in most places in India. Since then, they’ve been banned to various degrees and it’s gotten harder for customers to get them and for drivers there to find customers leading to a sharp drop in volumes.

Thanks to the entry of app-based taxi booking services such as Uber, Ola and TaxiForSure, entrenched players such as Meru Cabs and Easy Cabs started losing business. This is not unexpected, for the former operated at around Rs. 13-15 per km range (depending on discounts, time of day, etc.) while the latter operated around the Rs. 20 per km price point. This meant that for immediate trips and mostly intra-city movement consumers eschewed the likes of Meru and embraced the likes of Ola.

In the last few weeks I’ve spoken to taxi drivers (mostly Uber; Ola drivers don’t inspire much confidence and so I don’t indulge them in conversation; and I’ve never got a cab via TaxiForSure) who have been affiliated to more than one aggregator, and from that I get what the problem with Meru’s pricing is.

What sets apart Meru, KSTDC and Mega Cabs is that the three are the only operators with a license to pick up passengers from the taxi rank at the Bangalore Airport. Any other taxi that you might book (Ola or Uber or a local cabwallah) don’t have the rights to pick up passengers there and park in the airport’s taxi parking zone. They instead have to park in the space allocated to private cars, paying the parking fees there, and  there is usually a delay from the time when the driver meets the customer at the arrival gate to the customer actually getting into the car. This distinction means that the likes of Meru and Mega offer superior service to the other operators at the airport and thus can command a premium price. Getting into anecdata territory but I always prefer to get a cab from the taxi rank (though the queue occasionally gets long) than to book a cab for which I’ve to wait.

At the city end, the difference between Meru and Uber (Ola is in an intermediate state) is that you can pre-book a Meru, while Uber only accepts “spot bookings”. This difference in service levels means that you can never be assured of getting an Uber at the time you want to leave for the airport – there is a statistically high chance of getting one but you don’t want to take the risk, and thus prefer to pre-book a Meru or a Mega, which lets you know at the time of booking if they are able to service you.

Now, this guarantee from a Meru or a Mega comes at a cost. An Uber cabbie who also drove for Easycabs told me that Easycabs would allocate his trip an hour before it was scheduled to start. Since Easycabs would have assured the customer of a cab reaching his place at the appointed time, this means that they need to account for a sufficient buffer to ensure that the cab does reach on time. Thus the allocation an hour in advance. This cabbie told me that from his point of view that was inefficient, for in the one hour of buffer that EasyCabs would add, he could complete one additional trip through Uber!

So it is clear as to why Meru is more expensive than Uber/Ola – their pre-booking provision means that they have to potentially ground your cab for an hour before pickup, and there is a license fee they have paid the airport for the right to pick up passengers from the taxi rank there. Notice that both these factors also result in increased convenience for passengers. So effectively, Meru is justified in charging a premium. The question is if the current structure is optimal.

The problem with Meru is that their fare structure doesn’t appropriately represent cost. A pre-booked taxi costs as much as a taxi hailed at the time of demand. A taxi from the airport (where they have paid license fee) costs as much as a taxi from anywhere else. So while their cost structure might be optimal for travel to and from the airport, the structure simply doesn’t work out for other rides. And they are getting priced out of non-airport rides.

Assuming that they want to get more non-airport rides for their fleet, how do they do it? The answer is rather simple – let the fare structure reflect cost. Rather than tacking on every piece of cost to the per kilometer fare, they can have a multi-part fare structure which is possibly more “fair”.

A typical trip from the airport to the city is about 40 km, and costs around Rs. 800 (excluding service tax). Instead of charging Rs. 20 per trip, how about charging Rs. 16 (Ola’s rate) per kilometer and an additional Rs. 200 “airport charge”? At the other end, how about charging an additional Rs. 100 or Rs. 200 as pre-booking charge in order to account for driver’s idle time on account of the pre-booking? If they were to charge this way, they will both make as much money as they currently do on airport trips, and also compete with Ola and Uber on intra-city immediate-ride trips.

To take an extreme analogy, this is like asset-liability management – prudent banking dictates that the term structure of your assets reflects that of your liabilities. Similarly, prudent pricing (to the extent it is practically implementable) dictates that your price structure reflects on your cost structure!