Kiasunomics 2: Economic Insights For Everyday Life. Sumit Agarwal
from the hot weather. Rain had been torrential. The weather extremes saw an increase in visits to the doctor. Many were falling sick.
The rainy weather had also made it difficult to commute. That was good news for Teng. His services were in demand whether through taxi or Grab. Once, when there was a sudden downpour, Teng received a flurry of bookings both through the taxi as well as Grab. With so many requests and having to constantly keep an eye on the road, he wasn’t sure which booking he should respond to.
On the one hand, the NTUC Comfort taxi that he had been driving for so many years had fixed rates. On the other hand, Grab had a surge pricing mechanism which allowed fares to escalate when there was unusually high demand.
Surge Pricing
Surge or dynamic pricing is a system used by car-sharing apps that adjusts fares according to passenger demand in a particular area at a particular time. Some ride-hailing apps claim that they use surge pricing to encourage more drivers to get out on the road when demand is high such as on rainy days.
Grab introduced surge pricing with its JustGrab services in 2017. JustGrab allows commuters to book a ride from the closest private car or taxi at a similar price. It pools together taxis from participating fleets as well as private cars that have independent drivers not affiliated with a taxi company. Prices are based on a dynamic surge factor mechanism where taxi trips booked via the JustGrab service are priced dynamically within the Grab service platform using Grab’s surge pricing scheme.
Teng, as a driver for NTUC Comfort as well as for Grab, was in two minds as his fares vary. Taxis hired through either street pick-up or the taxi company’s own booking app have fixed meter prices based on location and time that do not vary according to real-time market conditions. However, taxis hired through Grab’s app are priced dynamically according to the surge price mechanism.
Teng recalled how his parents were once left stranded because of a heavy downpour and they couldn’t get a cab. And the surge prices were, to him, quite astronomical at times compared to fixed meter prices. While on the one hand it’s a pure money-making transaction to use the surge price, he felt badly as he remembered all too well how some people especially the elderly could not afford the high fares when they needed the ride most.
Teng had not quite got a handle on how surge pricing works and how the supply of taxis is affected when such pricing takes place. He had talked to several of his taxi driver friends who claimed they know much about surge pricing but didn’t seem to know what they were saying when probed further.
“More like bravado talk than anything else,” thought Teng.
The Young Man
Then one day, while on a break at the crowded Pek Kio market, it so happened that Teng was sitting next to a Grab driver eating kaya toast with half-boiled egg over a cup of coffee. He was curious why such a young man would be driving Grab. Doesn’t he have any other job?
It turned out that the young driver had been a research assistant at NUS Business School working on a research project involving taxis. The project had just been completed and his contract ended. So while in between jobs, the man decided to be a Grab driver to earn some money in the meantime.
“How come Grab can charge fares that are sometimes cheaper than taxi fares?” asked Teng, in his Singapore English. He was curious how Grab does it. He understood that in the early days, discounts were given when Grab was competing with Uber for market share. But with Uber out of the picture, discounts are still sometimes given for rides in conjunction with food purchases on GrabFood.
“Well, Grab has so many investors interested in injecting capital into this start-up,” said the young man.
“Have you heard of SoftBank? This Japanese company injected lots of money into Grab. So with the capital raised, Grab can subsidise the fares and incentivise their drivers.”
“Oh . . . So they have lots of money,” said Teng as he tried to figure out the business model.
“Let me tell you about my previous job. I was at NUS working for my professor after I graduated. He had this very interesting study on how surge pricing affects the supply of taxis on the road,” said the young man, happy to share what he knew with Teng.
Teng was keen to listen. After all, this was an issue that he had been grappling with for a while and none of his taxi driver friends seemed interested or to know enough about it.
“Compared to taxi prices, the fares of ride-hailing services such as Grab are set dynamically by the ride-hailing app’s algorithm that takes into account the demand and supply of rides,” said the young man.
“Oh wait . . . Go slow please. You’re talking to an ‘uncle’ who has only ‘O’ level, OK? I’ve no research experience at all,” laughed Teng while acknowledging his limited formal education.
“Sorry, Uncle. Let me explain slowly. Grab’s prices are determined by supply and demand. It is not fixed by the meter. In other words, it’s dynamic or flexible, depending on the situation. When demand is very high, the fare can go up a lot, much higher than the metered taxi fare.
“Let’s call this the surge factor. I know it’s a big word. But bear with me. The surge factor represents the relative price difference between the fares charged using a ride-hailing app and a standard taxi,” explained the young man slowly.
“For instance, if the Grab fare is $10 and the taxi fare is $9.50, then the surge factor is low because the price difference is small. But if the Grab fare is $15 and the taxi fare is $9.50, then the surge factor is high because the price differential is large.
The surge factor represents the relative price difference between the fares charged using a ride-hailing app and a standard taxi.
“So, why would Grab fare be so high, you might ask. That happens when there is more demand than supply for Grab. This would be the case when it is raining heavily and many people need a ride than there is supply of Grab cars or taxis.”
“Or when the MRT breaks down,” interjected Teng as he recalled the numerous MRT (Mass Rapid Transit) breakdowns that Singaporeans have experienced.
“But for taxis,” the young man continued, “the fare is based on distance travelled as measured by the meter rather than on demand. This results in Grab prices possibly becoming higher than taxi prices. When Grab prices are higher than taxi prices, the surge factor is more than one.
“Is this OK so far?”
“Eh . . . Yes. I think I understand,” replied Teng tentatively.
“Now, here’s the reverse. When there is more supply of Grab cars than there is demand, that is, there are more non-hired Grab cars on the road than there are people wanting a ride, it is likely that the Grab fare will be cheaper than the metered taxi fare. If that is the case, the surge factor is equal to or less than one.”
“OK. I think I follow so far. Surge factor is greater than one when Grab fare is more than taxi fare. Surge factor is one or less when Grab fare is less than taxi fare,” clarified Teng just so that he got it correct.
The young man nodded.
“But please, don’t get more technical. Otherwise, I think I’ll be lost,” pleaded Teng.
“Don’t worry, Uncle. You are doing fine. We’ll take it slowly,” smiled the young man encouragingly.
“My professor used two sets of data. The first dataset is on taxi mobility. This contains the number of taxi trips across all operators and the trip types at every 30-minute interval. This means we know where each trip started and where it ended. We also know whether the ride was initiated through a booking, a street pick-up, a limo service or whatever.
“Because my professor wanted to find out the effect of surge pricing on taxi supply, he focused on taxi bookings of the two taxi operators who at that time forbade their drivers from participating in the Grab service. By doing that, he can tell the effect of surge pricing on the availability