My views by referring economists theory about surge pricing.
Surge pricing is not impacting on the user and also not creating a gap in a market, this perception of dynamic pricing is derived from the common man's limited knowledge of the subject. Surge pricing' is considered as greed for the money against consumer interests. Actually, it's demand versus supply.If we do analysis it can help to remove myths surrounding surge pricing concept. We should understand what surge pricing is and how it works.
Surge pricing is a signaling mechanism that identifies a gap between demand and supply.
Let us assume that a specific region experiences a sudden increase in demand. How do the service providers get this information?
The demand signal is derived from the more number of people are looking for the same service. Similarly, the supply signal is derived from the number of service providers available that point of time.
A demand signal that is higher than the supply signal signifies a surge in demand over the prevailing supply. This gap between demand and supply can be rectified either by reducing the demand or by increasing the supply. Demand is reduced by increasing the price of availability of the product or services. As the Potential customers are shown the surge pricing in multiples of normal pricing. The higher the demand-supply gap, the higher the multiple. The new price point automatically reduces the demand for the resource and achieves a new equilibrium.
How does the supply increase?
Depending on the pricing levels, suppliers can opt to move their resources to the region with higher pricing to service the demand and take advantage of it. The price signal is critical in managing demand efficiently as well as reallocating supply.In this context, potential customers are not forced to buy that product or use the service.
The consequence of surge pricing:
1.All demand during surge period doesn't convert into business.
2 Services needs are satisfied by multiple players, due to this service provider may lose customers to these different suppliers while opting for the right pricing strategy.
3.If the price point is higher than the customer's expectations, then there are other options available for the customer, or the customer can decide to wait.
4.If more customers decide the same, then the demand for the product or services would dip, forcing the surge pricing level to plunge.
What would happen if there is no surge pricing?
The demand-supply gap would never be discovered. The higher multiplier suppresses demand by forcing the customer to rethink as well as conveying the degree of mismatch. This leads to faster corrective action in the market, leading to quick drops in surge prices.
In Ola and Uber surge price case, cap price would suppress the true nature of the demand-supply gap.
The theory of surge pricing may be implemented by Uber and Ola are based on their experience, the basics are still defined by simple economic theories.
A 5.0X conveys a higher mismatch in demand-supply than a 2.0X surge price. It conveys the scarcity of the resource now than the latter. Similar to models adopted in most sectors with supply constraints, such as aviation and hospitality. Surge pricing by cab aggregators is perhaps the only model which helps tackle both demand and supply side issues.Now Indian Railways is experimenting with dynamic pricing, in these sectors new supply is not created; only demand is regulated by pricing.
How can government help in surge price?
Capping price controlled by the government has burdened the industry with inefficiencies. The government can play an enabling role by removing such restrictions to a service provider, which will help in discovering demand-supply gap.
