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What is Surge Pricing?
Apr 30, 2016

Taxi aggregator service Uber has been operating in India for almost two years without anyone bothering about ‘Surge pricing’—where cab fares multiple with rising demand.

But the controversial model hit the headlines during the ongoing second phase of the odd-even scheme in Delhi, when fares on Ola and Uber went by up to five times the usual price due to high demand.

Surge Pricing

What is the definition of the term ‘Surge pricing’?

What does the term ‘Surge pricing’ mean?

  • ‘Surge pricing’ occurs when a company raises the price of its offering if there is an increase in demand. For instance, Uber announced that they would be implementing ‘Surge pricing’ during odd-even scheme in Delhi.

  • Their strategy is simple—if available supply of drivers became very low, the company would raise pricing. This strategy would help to increase supply, as it would encourage more drivers to work. Without surge pricing, supply would eventually run out and people wouldn't be able to hire a driver.
  • Fares of taxis surge when the demand exceeds the supply. This means, the number of people requesting for cabs is more than the number of cabs available in the city. The surge happens on the base fare fixed by cab aggregators.

How does it work?

Cab aggregators such as Ola Cabs and Uber create algorithms that calculate the number of requests at any given point, and equate it with the number of cabs available. The process and fares are dynamic. The higher the demand, the higher the surge, at times as high as four times the base fare.

During surge, cab drivers clock higher fares. A portion of this goes to the cab aggregators. The higher the surge, cab aggregators make more commission. Surge also helps in prioritising travel. A person who needs to go for a meeting or reach the airport takes the cab at the surged price, but anyone who wants to go out for shopping waits till the surge ends.

How are prices calculated?

The mechanism of calculating surge prices is similar to ticket prices in airlines–cost of travelling drops or increases closer to the date of travel and on occupancy.

Uber and Ola Cabs use proprietary software and algorithm to calculate demand and supply, and it happens by the minute. Cab aggregators do not have control over supply, but surge helps in getting idle capacity out on the roads.

What happens once surge prices come into effect?

Once, the surge happens drivers are who are at home also come out—it’s like a bait to earn more. That helps in increasing supply and bringing down the surge. Surge helps in maintaining equilibrium, the companies say.

  • Surge Pricing: Raises prices when demand is strong and lowering prices when demand is weak.

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