Decoding the Economics Behind Surge Pricing and How It Benefits users and the taxi industry

By admin / 10 months ago

Decoding the Economics Behind Surge Pricing and How It Benefits users and the taxi industry


Be it Mumbai or New Delhi, the ‘surge pricing’ method garnered a lot of attention and has been a topic for debate in the last year.  Surge pricing, often called dynamic pricing, is a tool used by companies like Uber and uber clone apps when the number of ride requests exceeds the availability of cabs in a particular zone.

There has been a lot of controversy around this pricing strategy when applied to on-demand taxi services. This article focuses on the surge pricing model and how it affects all parties which include drivers, taxi aggregators, and commuters.

What is Surge Pricing?

In economics, surge pricing refers to a time-based pricing strategy where businesses set flexible prices depending on the market demand. This type of pricing model is used by airlines, hotels, railways The same pricing model is applied to uber clone app ride-sharing models as well.

Taxi aggregators use a costing algorithm that figures out the demand-supply in a particular zone and decides the rate accordingly. The cab fares increase when the ride request exceeds the number of cabs available in a specific zone. At peak times, the available cabs charge 3 to 5 times of the normal fare to cater to the needs of the consumer. 










How Does Surge Pricing Work?

There have been a lot of arguments on how the surging price mechanism works in on-demand cabs. The logic applied is simple and easy to understand. When the supply becomes low compared to the demand, the price is multiplied in order to match supply with demand.

In the case of on demand ride sharing taxis in the uber clone app , when the requests for cabs are greater than the number of available cabs at a specific zone, the commuter will see a multiplier to the usual rates. The multiplier increases with the demand for the rides in the specific area of the commuter.

The algorithm checks the demand after a specific time interval and the prices increase until the supply and demand reach equilibrium. Consider the example of Uber, a pioneer to introduce surge pricing. The automatic pricing algorithm monitors the number of requests and available cabs at the zone every five minutes. Whenever there is an imbalance between demand and supply, the base fare gets multiplied. This way, the cab aggregator is able to quickly connect the rider with the driver and get the system running




 Need for Surge Pricing

Dynamic pricing is basically an economic mechanism which is aimed at reducing the gap between the supply and demand. For cab service and uber clone app providers, it acts as an essential tool to match the supply and demand during times where there is an imbalance. It is a desirable alternative to the ‘no cab available’ worries of the rider. It helps to improve efficiency and optimise the number of rides for the service provider.

It benefits and helps cab aggregators because the price inflation will reduce the demand for rides at peak times. Riders may choose to travel to a different zone or wait for the surge to come down. This, in turn, opens up an opportunity to those riders who need an instant cab and are willing to pay a higher fare. The service providers can ensure quicker pickup time as well as better customer experience for them.

Surge pricing model enables taxi cab aggregators to complete as maximum rides as possible. When price inflation occurs, drivers get a notification about the surge prices at a specific zone. They have the option to quickly move to the specific zone of surge pricing leading to an increased number of cabs there. Apparently, the supply-demand will be balanced and the price becomes normal with time.



Will Surge Pricing exist in the future?

 Surge pricing does not seem to go anywhere in the future. It is commonly being used by other on-demand industries as well. By using algorithmic decisions based on data, businesses invent  new ways to balance the supply and demand. As technology improves, it becomes easier to employ dynamic pricing systems by real time tracking.

If done in a properway and under regulations, dynamic pricing benefits all the parties in the ridesharing ecosystem.The surge pricing system ensures a safe ride-on-demand for the riders by balancing supply and demand. It is often reviewed that dynamic pricing with maximum limits is beneficial for riders, drivers, and service providers alike.


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