For-hire vehicle surge pricing restrictions

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For-hire vehicle surge pricing restrictions are policies designed to limit when for-hire vehicle companies can implement surge pricing, the practice of increasing fares when demand for rides is high, and how much they can charge during it. Transportation network companies (TNC) are the primary users of surge pricing. Because these companies are in their early stages, minimal regulation has been passed in this policy area. In contrast, taxi fare rates maintain a fixed schedule barring certain surcharges for time of day and fuel costs. [1] [2] Evidence suggests that surge pricing attracts drivers to operate for-hire vehicles, and surge pricing restrictions may reduce the availability of rides. Given the minimal available data and regulations surrounding surge pricing, policy outcomes are currently unclear. Proponents of surge pricing restrictions wish to prevent price gouging during emergency situations, while opponents argue that surge pricing ensures that an efficient quantity of rides is provided.


CONCEPT


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Goals

Direct Goals

Indirect Goals

Conceptual Example

A state would implement surge pricing restrictions to address public concerns over price gouging because all of its citizens should have access to affordable and accessible transportation options. Because transportation network companies use surge pricing in their fares, a state adopts policies to limit how much these for-hire vehicles charge for providing rides. This ensures that potential riders have comfort in the fact that they will not face drastically high prices. A state can impose a maximum fare multiplier to keep prices from becoming extremely high. Additionally, a state can choose when this maximum multiplier is in effect, which allows officials to increase affordability of rides in a wide range of scenarios, which may include emergency situations caused by weather, when people need rides the most, New Year's Eve, when providing rides for inebriated individuals is conducive to public safety, or all the time. Restrictions in surge pricing result in less for-hire vehicles supplying rides to passengers, which require other transportation modes to fill the gap.

Specific Example

On July 8, 2014, the state of New York came to a three-year agreement with Uber to limit surge pricing during abnormal disruptions of the market, defined as "any change in the market whether actual or imminently threatened, resulting from stress of weather, convulsion of nature, failure or shortage of electric power or other source of energy, strike, civil disorder, war, military action, national or local emergency, or other cause of an abnormal disruption of the market which results in the declaration of a state of emergency by the governor." [3] This agreement averted a potential lawsuit from Uber's likely violation of state price gouging laws. [4] The cap for surge pricing would be the highest surge multiplier charged within the 60 days preceding the state of emergency, excluding the three highest-priced, non-emergency days. The cap varies depending on the service option chosen (i.e. UberX and Uber SUV could have different caps). Uber independently adopted this as a national policy. [5] Other TNCs, such as Lyft, have self-imposed multiplier caps independent of this agreement. Lyft's policy is a maximum multiplier of three times the base fare, which previously applied to all rides, but now only applies to emergencies after a 2016 decision to eliminate caps for non-emergency rides. [6] Research suggests that a larger magnitude of the surge pricing multiplier increases ride supply, which implies that restrictions limiting the magnitude of the multiplier theoretically should decrease ride supply.

Tradeoffs

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Tradeoffs of implementing this policy may include:

  1. Reduced availability of rides during peak periods [7]
  2. Increased regulatory burden on technology companies
  3. Reduced income for drivers
  4. Reduced usage of public transit due to decreased cost of rides [8]
  5. Increased reliance on taxis, which promotes general automobile transportation
Compatibility Assessment

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If answered yes, the following questions indicate superior conditions under which the policy is more likely to be appropriate:

  1. Are the necessary government agencies able to obtain complete and accurate pricing data to adequately enforce regulations on prices?
  2. Are transportation network companies in the area dramatically increasing their prices to undesirable levels to respond to spikes of service demand?
  3. Can surge pricing restrictions be imposed without resulting in a significant shortage in for-hire vehicles?
  4. Are sufficient alternative means of transportation available to absorb the shift in travelers in case lower fares create a shortage of for-hire vehicles?
  5. Will pricing and location data from transportation network companies create changes in how taxis operate in these two dimensions?


Design

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Assuming that a jurisdiction has decided to adopt the policy, the following questions will need to be answered when determining how to implement this policy:

  1. When should surge pricing be limited?
    1. Surge pricing regularly occurs during peak commuting hours and states of emergency, which makes these situations targets for price restrictions to prevent price gouging. The national policy spurred by the agreement with New York State addresses the latter circumstance.
  2. What is the right limit for prices?
    1. Given the static nature of taxi fares, that could serve as a baseline comparison for prices charged in surge situations. As per the New York State agreement, the cap takes the form of a maximum surge multiplier equal to the highest multiplier in the last 60 days, excluding the 3 highest, non-emergency days.
  3. After what period, if any, will the surge pricing restrictions be scheduled to be sunset, forcing it to be reconsidered?
    1. Sunsetting surge pricing restrictions may more effectively force policymakers to revisit what has recently been a fast-evolving field of technology and regulation, potentially mitigating the difficulty of changing the policy if desirable after several years. Alternatively, imposing a sunset may also risk a future regulatory interruption if a new regulation does not replace original restrictions in a timely manner.
  4. What will the fiscal impact of this policy be on other transportation modes?
    1. Improvements to mass transit systems, which can substitute for for-hire vehicles, require significant funding. Reducing the supply of rides will increase or maintain bus and rail ridership, thus increasing or maintaining revenue used to improve mass transit systems.
  5. What government agencies are in charge of this type of regulation?
    1. The Taxi and Limousine Commission is in charge of rates in New York City, and the California Public Utilities Commission is by law, in charge of rates for ridesharing companies in the state of California and can theoretically set surge pricing restrictions. However, a bill aiming to regulate surge pricing did not pass the California State Senate. [9]


ADOPTION


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PolicyGraphics
Adopters
  • Notable entities who have implemented or adopted this policy include:
    • State of New York [3] - Limits surge pricing during emergency situations
    • State of California - The California Public Utilities Commission may "fix rates and establish rules for the transportation of passengers and property by transportation companies, prohibit discrimination, and award reparation for the exaction of unreasonable, excessive, or discriminatory charges." While California officials theoretically can create surge pricing restrictions, a law addressing discriminatory pricing failed to pass. [10]
    • City of Boston [11] - Surge pricing capped during snowstorms
    • District of Columbia [12] - Surge pricing capped during transit shutdowns


STAKEHOLDERS


Supporters

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Opponents

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REFERENCES


Research

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  • Dynamic Pricing in a Labor Market:Surge Pricing and Flexible Work on the Uber Platform. Chen, Keith & Sheldon, Michael. (2016). Association for Computing Machinery. 2016 ACM Conference. This paper finds that surge pricing significantly increases the supply of rides and drivers work longer hours in response to higher wages.
  • Using Big Data to Estimate Consumer Surplus:The Case of Uber. Cohen, Peter et al. (2016). National Bureau of Economic Research. Working Paper No. 22627. This paper calculates the demand elasticity for UberX and estimates that UberX rides generate $6.8 billion in consumer surplus.
  • Fairness as a Constraint on Profit Seeking: Entitlements in the Market. Kahneman, Daniel et al. (1987). The American Economic Review, 76(4), pp. 728-741, September 1986. This paper discusses how people perceive fairness with regards to price increases, finding that a majority of people view raising prices in response to a shortage as unfair even when close substitutes are readily available.
  • Surge Pricing and Price Gouging:Public Misunderstanding as a Market Imperfection. Suranovic, Steven. (2015). Institute for International Economic Policy, Working Paper No. 20. This paper argues that surge pricing in the free market provides a fair and efficient allocation of goods and services, with the inefficiency in the for-hire vehicle market being public opinion and misunderstanding around market effectiveness.
  • Peeking Beneath the Hood of Uber Chen, Le et al. (2015). Association for Computing Machinery. 2015 Internet Measurement Conference. This paper discusses the frequency, fairness, and duration of surge pricing, finding that it has a strong, negative effect on passenger demand for rides.
Resources

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  • Why Uber's surge pricing is naive economics King, Stephen. The Conversation. January 10, 2016. An op-ed written by an economist that is critical of surge pricing because it is against a transportation network company's long-term profit interest to harm relationships with customers, who have long memories.
  • The Ridesharing Revolution: Economic Survey and Synthesis Hahn, Robert and Metcalfe, Robert. Oxford University Press, Vol. 4. January 10, 2017. This Brookings report summarizes existing research and highlights the uncertainty of the effect ridesharing platforms have on a whole suite of issues, including reducing pollution and increasing transportation access. The report emphasizes the need for continued research to fully understand the extent of these effects.
  • Accessibility Service in Ottawa KPMG. August 25, 2015. This KPMG report outlines three potential fare options for the City of Ottawa with regards to TNCs. These three options are a fixed fare similar to taxis, which increases predictability, a maximum fare set at the current taxi fare level, which protects customers from extraordinarily high fares, or an unregulated fare, which is market efficient.
  • For-Hire Vehicle Transportation Study City of New York, Office of the Mayor. January, 2016. The Mayor's Office of New York City report discusses reasons why people decide to use ridesharing platforms and includes a survey that finds that while most customers generally understand how surge pricing works, 44% view the practice as unfair.
Footnotes
  1. Taxicab Rate of Fare. City of New York, Taxi & Limousine Commission. Accessed April 8, 2017.
  2. New York City Approves 30¢ Surcharge to Pay for Accessible Taxis. Flegenheimer, Matt. New York Times. April 30, 2014.
  3. 3.0 3.1 A.G. Schneiderman Announces Agreement With Uber To Cap Pricing During Emergencies And Natural Disasters. State of New York, Office of the Attorney General. July 8, 2014.
  4. Taming the Digital Wild West. Scheiderman, Eric T., New York Times. April 22, 2014.
  5. 5.0 5.1 Partnership with American Red Cross to Support Cities and Citizens During Disasters. Uber, Uber Newsroom. July 8, 2014.
  6. Standing Together: Community Update From John. Lyft, The Hub. February 2, 2016.
  7. How Uber Conquered London Knight, Sam. The Guardian, April 27, 2016.
  8. Uber and Lyft Want to Replace Public Buses Brustein, Joshua. Bloomberg Technology, Bloomberg. August 15, 2016.
  9. SB-1035 Transportation Network Companies California State Senate, March 29, 2016.
  10. 10.0 10.1 Bill would ban 'surge pricing' by Uber, rideshare services Brunelle, Will and Rubinstein, Dana. Politico New York, Politico. February 13, 2015.
  11. How Uber Chooses Its Surge Price Cap in Emergencies Kim, Susanna. ABC News, January 26, 2015.
  12. Uber is capping surge prices at 3.9x while Metrorail is closed Stein, Perry. Dr. Gridlock, The Washington Post. March 15, 2016.
  13. After Uber, San Francisco Has Seen a 65% Decline in Cab Use Garber, Megan, The Atlantic. September 17, 2014.
  14. The newest battleground between public transit and Uber, Lyft is an unlikely one Baldassari, Erin. The Mercury News, Bay Area News Group. March 25, 2017.
  15. “They Can Just Take an Uber” Grabar, Henry. Metropolis, Slate. December 14, 2016.
  16. Making ridesharing more affordable in Pinellas County Uber, Uber Newsroom. August 4, 2016.
  17. Uber Users Are Complaining About Pricey New Year's Eve Rides White, Daniel. Time. January 1, 2016.
  18. How Surge Works Driver Resources, Uber. Accessed April 10, 2017.
  19. 19.0 19.1 With Uber, Less Reason to Own a Car Manjoo, Farhad. State of the Art, New York Times. June 11, 2014.
  20. Uber's Big Data Effect On The Taxi And Transportation Industry Cordray, Robert. Digitalist Magazine, SAP. September 10, 2015.
  21. The True Costs of Driving Cortright, Joe. The Atlantic. October 25, 2015.
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