SURGEPRICING

1.5X

Osho Kharbanda

Price Discrimination• Price discrimination is defined as a business charging different

consumers different prices for the same product

• Price variations do not fully reflect the marginal cost of supplying a product e.g. higher costs for parcels delivered over short and long-haul distances in the UK and overseas

• There are several types of price discrimination

• 1st degree discrimination

• 2nd degree discrimination

• 3rd degree discrimination

• The Hurdle Model of price discrimination

SURGE PRICING 01

Types of Price Discrimination• 1st Degree

• Charging different prices for each individual unit purchased – i.e. people pay their own individual willingness to pay.

• 2nd Degree

• Prices varying by quantity sold e.g. bulk purchase discounts

• Prices varying by time of purchase e.g. peak-time prices 2nd degree

• 3rd Degree

• Charging different prices to groups of consumers segmented by price elasticity of demand, income, age, sex

SURGE PRICING 02

Hurdle Model of Price Discrimination• The hurdle model is associated with economist Professor Robert Frank

• The hurdle method separates buyers with low willingness to pay from those happy to pay a premium price – often to be the first to use it

• To take advantage of a lower price, the consumer must be prepared to overcome or jump over some kind of hurdle which acts as an inconvenience. For example:

★ They might have to delay a purchase until a product is remaindered, sold off at lower prices when a more advanced version is available e.g. second edition paperbacks, older DVDs

★ They may have to risk not getting the product at a time and place of their choosing e.g. relying on stand-by tickets for shows and airlines

• Customers prepared to do this tend to be more price sensitive (Ped>1)

SURGE PRICING 03

Surge Pricing• Surge Pricing:- Rates for taxi aggregator increase to ensure reliability when demand

cannot be met encourage more drivers to be available.

• DEMAND/SUPPLY ALGORITHM

• Heat mapping to indicate where the demand is

• “God View” – real time aerial view of the movement of cars

• Plenty of other data analyses, such as

• Analysing how many times the app is open

• Analysing accuracy of demand prediction to refine the prediction algorithm

• Calculating probability of accurate destinations and popular destinations

• SURGE PRICING ALGORITHM

• Automatically detects situations of high demand and low supply and adjusts price accordingly, depending on the level of shortage.

SURGE PRICING 04

SURGE PRICING 05

Surge pricing Patent Pending, Uber• US 2013/0246207A1 (pending grant)

• System and Method for Dynamically Adjusting Prices for Services

• Pricing algorithm automatically detects situations of high demand and low supply and hikes the price in increments, depending on the scale of the shortage.

• Algorithm results in increased supply and reduced demand.

• “Through these two mechanisms, the company is able to (a) increase supply, (b) assure reliability, a key tenet of the company, and (c) maximize the number of completed rides.” – Bill Gurley, Uber investor and board member

SURGE PRICING 06

Is it Legal?

SURGE PRICING 07

Is It Legal?

SURGE PRICING 08

Is It legal

• Uber came under fire for the surge pricing algorithm during the events

• Hurricane Sandy

• Sydney Hostage Siege

• Capped surge pricing from Jan 2015 for “abnormal disruption of the market” event

SURGE PRICING 09

Is It Legal-India

• Karnataka

• India saw its first specific aggregator regulations in the form of Karnataka’s new On-Demand Transportation Technology Aggregators Rules, 2016. These rules mandate that the aggregators must charge the rates fixed by the Karnataka government. While surge pricing is not specifically banned, it appears that it can be implemented provided it does not exceed the prescribed fare.

SURGE PRICING 10

Is It Legal-India

• Delhi

• In Delhi, aggregators were asked to register under the existing Radio Taxi Scheme, 2006. This scheme fixes the rates to be charged, allowing the taxi operator to charge less than the rate, and increase rates by 25% at night (11pm to 5am). During the recently implemented Odd-Even Scheme in Delhi this year, the Delhi government made it clear that surge pricing was illegal, and threatened strict action against violators.

SURGE PRICING 11

Is It Legal-India

• Maharashtra

• In Maharashtra, draft regulations have been framed in the form of the City Taxi Scheme, 2015, to deal with aggregators. These rules state that the aggregator must charge fares as prescribed by the Maharashtra government. The fare will be decided by the government based on the cost of the vehicle or its engine capacity. It appears that the rules will not allow even a lower fare to be charged, leave alone using surge pricing.

SURGE PRICING 12

Is It Legal-India• West Bengal

• The most aggregator friendly regulations were those issued in Kolkata through a temporary Order by the Office of the Commissioner of Police, Bidhanagar. This order was issued for a period from January to March, 2015. All that this order said with respect to fares was that the amount to be paid must be conveyed to the customer via an e-mail or SMS.

• No further restrictions were imposed on the amount to be charged, nor was anything said on whether surge pricing was legitimate, giving aggregators complete freedom to decide their rates.

SURGE PRICING 13

THANK YOU