SUMMARY
the Government of Karnataka issued an order on February 3, 2024, establishing a uniform fare structure for all taxis, both traditional and app-based
Specifying floor prices hurts consumers the most - it deprives them of the benefit of reduced prices when demand trails supply
The reduced profitability resulting from standardised pricing may significantly decrease returns on capital investments
Well-intentioned policies do not always produce favourable outcomes. Governments frequently implement policy changes with the noblest of intentions but encounter a variety of unintended consequences, often more severe than the problems they sought to resolve.
The recent decision by the Karnataka government to cap fares for both traditional and app-based taxis exemplifies how good intentions can lead to poor results.
What Does The Karnataka Government Seek To Achieve?
To potentially prevent price gouging, and more importantly, to create a more equal competitive landscape between traditional taxi operators and the new-age app-based taxi service providers, the Government of Karnataka issued an order on February 3, 2024, establishing a uniform fare structure for all taxis, both traditional and app-based.
All taxi operators must now follow the price specified by the Government, which is linked to the underlying value of their vehicles.
Traditional taxi operators have struggled to compete with new-age, app-based taxi operators. Naturally, they have long lobbied for Government intervention. Consumers who happily migrated to app-based taxi service providers, lured in by lower introductory prices, are now loath to pay surge prices.
The Karnataka government seeks to solve both of these problems by fixing prices. In the process, Karnataka risks upsetting its credentials as a business-friendly destination, seeking to attract a greater number of entrepreneurs to set up shop in India’s Silicon Valley – Bangalore and other parts of the state. Equally, its intervention will hurt consumers.
The fixed price structure, based on the value of the vehicles, will prevent excessive pricing. Customers will no longer be at the mercy of dynamic pricing algorithms or conventional taxi operators who endeavour to maximise profits by exploiting customers’ limited options during rush hours, late hours or at remote locations.
The fixed price structure introduced by the Karnataka government does not impose price limits while offering flexibility to taxi operators to charge lower prices. Instead, it establishes flat fares for the first 4 kilometres and a fixed per-kilometre rate for subsequent distances. These flat fares vary depending on the value of the vehicles.
In essence, the Karnataka Government has introduced both a cap on the fares and a floor- by specifying a flat rate for vehicles valued within the same band.
Specifying floor prices hurts consumers the most – it deprives them of the benefit of reduced prices when demand trails supply. New-age, app-based taxi operators solved this problem – by deploying algorithms mapping demand and supply on a real-time basis to discover the optimum prices for consumers. Riders in Karnataka will no longer benefit from this innovation.
Floor prices mimic outcomes which otherwise result from collusion among competitors. Absent the Karnataka government’s intervention, to achieve uniformity in prices, all taxi operators would have had to collude – a conduct prohibited under the Competition Act, 2002.
When competitors agree to fix prices, consumers pay more or get less (poor quality). This is precisely what the Karnataka Government has helped achieve – in Karnataka riders will no longer benefit from lower prices when supply outstrips demand. They must always pay the price that the Government thinks is appropriate.
No Place For Innovative Business Models
Distinctions like vehicle type (hatchback, sedan, or SUV), the hum of air-conditioning, and top-notch service will no longer be relevant for determining taxi fares in Karnataka. Moreover, Karnataka which has established itself as the business-friendly, startup capital of India and a hub for innovation will no longer allow innovative business models in the ride-hailing industry.
India’s ride-hailing industry showcases a variety of business models addressing diverse customer preferences. Uber and Ola lead as convenient and affordable options, connecting passengers with independent drivers via their apps and earning revenue through ride commissions.
However, they have less stringent control over vehicle maintenance. BluSmart offers a distinct experience with its all-electric fleet and focuses on reliability. Though slightly pricier, they guarantee zero cancellations, superior vehicle quality, and professional drivers.
InDrive introduces a unique model where passengers propose fares, allowing drivers to accept, reject, or counteroffer. This platform also operates on a commission-based revenue model.
Each of these competing business models will now have to be re-imagined to meet the lowest common price dictated by the Karnataka Government. In essence, the lack of flexibility to charge different prices would end up reducing competition among taxi operators.
They would no longer be able to compete on price. The inability to moderate prices to reflect higher demand, would constrain app-based taxi operators’ ability to invest in improving the quality of their services.
Impact On Funding For New Or Potential Entrants
Fixed rates for taxis will entail certain consequences. The reduced profitability resulting from standardised pricing may significantly decrease returns on capital investments. This could potentially discourage new operators from entering the market. Equally, it could reduce the flow of funding for new taxi services.
The potential erosion of profit margins in the taxi industry may lead to less attractive valuations, causing PE and VC funds to become more cautious in their investments. Consequently, the growth and vitality of the once-thriving taxi services market in India could be negatively impacted.
