The Auto Rickshaw Problem - An Informal Economics Perspective

At the risk of being considered obsessed with auto rickshaws, I just thought of putting across some thoughts on the economics of the auto rickshaw problems that everyday commuters such as myself in Mumbai face.

Consider the profit structure of an auto-rickshaw driver:

1) Revenues - Fares from plying on different routes around different areas. This is a function of distance and waiting time.

2) Costs - Most drivers don't own their autos. They are typically owned by fleet owners. As far as I know the drivers have to pay a certain fixed sum to the owner and they keep what they make over and above that. The other costs, of course, are fuel and maintenance

3) Constraints: Fares are standardized (at least by law) on a cost plus basis. Also, drivers are not supposed to refuse any passenger (though that never happens!)

Note that standardized fares do not take the "illiquidity premium" of the destination into account. If the destination is such that it's difficult to find a fare, the driver will balk at going there. If pricing was free, the driver could ask for a premium over and above the metered fare. However, the monitoring in this regard (at least in the Bandra to Vile Parle belt) is quite strict i.e. Enforcement deters free pricing. This is not to say that meters themselves are not manipulated - that can still happen. But no one asks straight up for a fixed fare - they still go by the meter. Therefore, for such places, drivers simply refuse to ply.

Drivers also refuse to ply to places with heavy traffic. There are two reasons for this. The first is that the waiting time compensation is not adequate vis-a-vis the distance traveled. For example, drivers get approx 7 rupees per km. In an area with moderate traffic this distance can be covered in 3 to 5 minutes. For 5 minutes of waiting time they would get only around 1.5 to 2.5 rupees (again, with an ideal meter; However even with the best of manipulations they can't get more than 2.5-4 rupees). Hence, the aversion to heavy traffic.

Now look at the driver's optimization function. The best destination for him is the one which is at a long distance, in areas with less traffic and which will give good fare options at the end. Consequently, the worst destination is the one at a short distance, in areas with heavy traffic and which doesn't give good fare options. Another factor influencing his decision making is the place where has to deposit the vehicle.

Cost plus pricing proves to be inadequate because it treats all destinations as the same, not factoring in the fares potential. It also doesn't take into consideration the distance-waiting time differential.

An important behavioural hypothesis to consider - I believe most drivers are profit-satisficing, but not necessarily profit-optimizing. This is the piece de resistance in understanding why they have become so frustrating in the last one year or so in particular. I believe the major change that happened was the roughly 30% hike in fares in June 2010.

I was initially happy because I thought that with the fare hike there was no reason for drivers to refuse to ply even to unattractive locations. They would get adequately compensated. But because many of them are satisficing agents, not optimizing, they realized that they could make the same amount of money as before with fewer trips. Accordingly they could afford to be more choosy about where they wanted to go. And thats what we have been seeing ever since!

Another point - with respect to the queuing time at places like the airport, again the cost plus method is inadequate. A fixed charge over and above the metered fare, for queuing, would help in mitigating the problem.

How do other places address these problems? The example of Singapore is most instructive. The fares are non-linear. They are extremely high for short distances. The first km or so costs 3 Singapore dollars! The next costs only some 60-80 cents (if I remember correctly). This serves two objectives. Firstly, people are dissuaded from using cabs for short distances and are likelier to use the MRTS etc (I believe this is the primary objective of the fare structure). Secondly, the driver is incentivized to service people even for short distances (this is more of a secondary objective - in any case the monitoring is much stricter and no one is supposed to refuse fares)

Thus two things can be done:

1) The fares for shorter distances can be made a bit higher (They shouldn't be made too high, or else the reverse problem will happen - drivers will only want to ply short distance!)

2) The waiting time-distance differential can be reduced (However one caveat is that meters will need to be monitored strictly!)

3) The problem of unattractive destinations is tough to solve, because its difficult to price the premium of not getting fares from a location. It will vary with a lot of factors, such as for example, the time of the day. Standardizing this will be even tougher. One (admittedly imperfect) solution could be to allow passengers to give the driver a mutually agreed premium above the metered fare subject to a maximum percentage cap. This would have to be agreed beforehand. Of course, one would argue that the driver would ask for the maximum while the passenger would want to give nothing. However, the magic of demand-supply kicks in here. If the passenger truly believes that some incentive is justified, he will give something more than 0, and if the driver believes that the maximum is too much to ask for, he will reduce it.