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CHAPTER

Fickle Fingers

Teng, a taxi driver in Singapore, and his wife Siew Ling have two sons – six-year-old Ethan and two-year-old Ervin. Together with his parents, affectionately called Ah Kong and Ah Mah by the grandsons, they live in a modest government-subsidised HDB (Housing and Development Board) flat in Serangoon.

His earnings as a taxi driver had become increasingly difficult to maintain due to rising competition from ride-hailing app services such as Grab and previously Uber.

Uber, the larger of the two app services and the first entrant into the Singapore market, was sent packing after five years by Grab in August 2018. Grab, a Malaysian start-up, kept their finger on the customer pulse – listening and adapting to local needs and cultures of markets that it had entered. It saw an opportunity in Southeast Asia’s massive traffic jams and provided GrabBike – motorcycle taxis that could weave in and out of traffic in such markets as Indonesia, Thailand and Vietnam. With a keen ear on what different markets wanted, Grab began chiselling away Uber’s market share. The eventual exit of Uber from Singapore fortified Grab’s position with offerings beyond car sharing, including food delivery, offers on limited edition merchandise such as special-flavoured KitKat and even mobile wallet. By late 2018, another ride-hailing app, Indonesian Gojek, entered the fray.

On top of competition is the next generation of road pricing to be introduced in Singapore. To curb vehicles on the road, the current ERP (Electronic Road Pricing) that charges by entry into busy roads during peak hours will be eventually replaced by charges based on road usage. The more distance covered, the higher the toll. As a taxi driver, Teng wondered whether it would still be worth the while to cruise for passengers.

All these spell a headache for taxi drivers who have seen their earnings dwindle. More taxi drivers have been throwing in the towel and exiting the taxi trade, some even preferring to become full-time Grab drivers.

Ah Kong and Ah Mah had been concerned with Teng’s unstable earnings but he had assured them then that he knew where and when he could pick up passengers easily. And he remembered the budgeting and financial planning advice he had received from a well-meaning finance professor from NUS (National University of Singapore) whom he had given a ride to some years back. The professor had enlightened him of his research that showed some taxi drivers do not know how to target their earnings effectively.¹ And thankfully, he had signed up to be a Grab driver too as almost everyone he knows has a Grab app on their mobile phone.

But with two growing young kids and ageing parents to look after, household expenses were mounting. Teng was finding it more challenging to make ends meet. Siew Ling’s salary as a sales assistant at a nearby shoe store could barely cover the enrichment classes that she and Teng wanted the boys to attend.

“Should I become a full-time Grab driver?” Teng thought.

Ever since his parents raised their concerns about his taxi-driving vocation, the thought of making a career switch nagged at him now and then. Sometimes on a slow day while driving along the highway, Teng wondered whether it was still worth the while to stay on as a taxi and Grab driver. Or should he switch to be a full-time Grab driver? He had heard from his cabby friends who had decided to stop driving taxis altogether and become full-time Grab drivers that the expenses were less. It seemed that the rental of the car is lower too.

But with his easy-going personality, Teng tended to let matters slide. “Never mind. Don’t think too much. Just do good and be kind to others,” as he muttered his mantra while rubbing the small Goddess of Mercy statuette that his wife had carefully placed on his taxi dashboard on his first day of taxi driving, to ward off evil spirits.

Weather Changes

In 2019, Singapore experienced unusual weather for several months. From January to August, the island state had sweltering heat with temperatures rising to 39°C with not much rain. The same scorching weather was also experienced in Europe, India and several other parts of the world.

“This must be due to global warming,” mentioned Siew Ling. “Thankfully we have changed our lights to LED to save on electricity. That helps in gas emissions.”

“And remember the news report you told me about saving on air-con bills? I want to conserve but how can I do that since the weather is so hot? I need to use the air-con more often,” Ah Mah chimed in.

Ah Mah was referring to the time when she was shutting the windows and turning on the air-conditioning unit when there was heavy construction next to their flat. While their electricity bill was higher whenever there was such construction, their bills remained high even after the construction ended.²

Teng and Siew Ling learned from the news that Singaporeans tend to continue using air-conditioning because it has become a convenient habit even though there is no more noise or air pollution from nearby construction. Ever since then, the family has become more mindful of air-con usage.

Eventually there was some respite 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 of taxis from these two operators in a particular area.

“His data were collected every 30 minutes. Do you know why? Because that would allow us to see whether there are differences during peak hours and end-of-school hours versus non-peak hours. Is this good?”

“Yup, I got it so far. How about the second dataset?” enquired Teng.

“The second dataset contains a panel of all taxis in Singapore. We also collected the data at every 30-minute interval. Here, we know for each taxi whether the taxi is available or hired, and its location. This allows us to understand the supply of taxis. ‘Available’ taxis means they are available for hire, which means there is excess supply since they are not used; while ‘Hired’ taxis means they have been booked already by demand. And we do this for each operator in each area every 30 minutes. Understand?”

“Got it!” said an excited Teng.

The young man continued. “So we know the supply of taxis. How about Grab’s supply of cars? Grab offers a range of ride services – GrabHitch, JustGrab and so on. We studied JustGrab. JustGrab allows commuters to book a ride from the closest private car and participating taxi at the same price. So there’s private cars with independent drivers not affiliated with a taxi company as well as taxis from participating fleets which included about half of taxis in Singapore at that time.

“Now, remember that at the time of the study, not all taxi companies allowed their taxis to use Grab services. So the supply of taxis in our study is based on operators that forbid their taxis from participating in the JustGrab service.

“Unfortunately, Grab doesn’t want to share with us their data. We understand. It’s proprietary. So what my professor did was to use a proxy for JustGrab supply.”

“What is a ‘proxy’?” asked Teng, scratching his head.

“Ahh . . . A ‘proxy’ means a ‘substitute’. In our study, because we could not get data from Grab, we used taxis from taxi operators that permit their taxis to participate as JustGrab cars as a measure of the supply of Grab cars.”

“Is that accurate?” asked Teng. “JustGrab has other drivers too.”

“You are right. Our proxy for Grab supply is not perfect because private drivers are not included. Also, taxi drivers from participating Grab operators can choose whether to drive as a Grab driver or not. However, since at the time of the study, participating operators do not have other ways of booking rides through a smartphone app, the affiliated taxi drivers are most likely to choose to drive as a Grab driver,” explained the young man.

“So even though we do not have data from Grab on direct rides, we can study the relationship between Grab and taxi bookings due to the overlap of Grab cars and certain taxi operators in Singapore.

“Moreover, since the taxis that operate using the Grab platform are able to observe the surge factor, their driving behaviour should be similar with those of private car drivers. But then like you said, we do not have all the data. Not having the private car data from Grab means that our Grab supply is likely to be underestimated. It’s not perfect. Ideally of course my professor would love to have Grab data. We wish Grab would share with us some of their data. As academics, my professor will rigorously analyse the data and help Grab and the society with the findings.

“Anyway, I won’t go into the technical mumbo jumbo. The bottomline is that statistically, we can control for this bias in our analyses.”

Teng wasn’t so sure that he could intelligently follow how the data were analysed. But he was eager to learn the findings. After all, he didn’t really care about technical details. He’d leave that to the experts. All he wanted was to know the results and how they affected him as a taxi driver, and his family and friends as commuters.

“OK, are you ready?” asked the young man as he wanted so much to share the findings. “We found that Singaporeans are not very sensitive to the higher price of ride-hailing services when there is surge pricing. It’s like the ‘got no choice’ mentality. When the surge factor is high and there is a lack of available taxis as substitutes, people will just pay the higher fare.”

“Yah. I agree. They have no choice. What else can they do?” agreed Teng.

The young man continued, “But that’s not the interesting part. The interesting part is – we found that the number of taxis available do not match with the surge factor within an area during the time when there is surge pricing. Let me explain.

“When we book a taxi, the supply of taxis comes from the same pool of taxis as those available for street pick-ups. So when people are booking a ride either through Grab or calling for a taxi, of course the taxi driver will prefer to take up the booking because he earns the additional booking fee of $3 to $5. Street pick-ups, on the other hand, becomes less attractive. And so the number of street pick-ups goes down because taxis are diverted to pick up passengers from such bookings.”

[T]he number of taxis available do not match with the surge factor within an area during the time when there is surge pricing.

“That makes sense,” thought Teng as he obviously would rather have more booking rides than street pick-ups because of the booking fee earned.

The young man continued. “So, during the time of a taxi booking, the total number of taxis available in that area does not change. This means that the available taxis on the road in that vicinity can absorb these bookings, at least for a short period of time.”

“But what about when it is raining?” asked Teng.

“Good question. Rain is relevant because obviously rain affects demand. More people need a ride when it is raining, especially when it is raining heavily.

“The problem with rain is that not all taxi drivers are able to observe the surge factor due to rain. Only drivers near the area where it is pouring can observe the rain and know whether a high demand for taxis is likely to occur. So whether it is raining or not is common information only to drivers in the rainy area.

“Now, rain may increase taxi supply because drivers are anticipating more demand. But rain can also raise concerns about road conditions, safety and congestion. There are some drivers who avoid driving on rainy days.”

Teng nodded as he knew of some taxi drivers who do not like driving when there’s a heavy downpour.

“We found that in general, during rainy periods, taxi supply increases by 0.37 percent. But when it rains and the surge factor goes up by 10 percentage points, guess what happens? The total taxi supply goes down by 2.3 percent. Down, OK? Not up.

“And as to be expected, we found that when the surge factor is high and people are booking either through Grab or directly from the taxi company, there are more booked taxis and fewer ‘Available’ taxis. Taxis on the street are diverted to absorb the demand from such bookings and there are less for street pick-ups.”

“Yah, that makes sense,” nodded Teng.

“But let me ask you this. If you were a smart passenger and there is surge pricing, how should you book your ride?”

The young man paused for effect.

“Let me tell you how much a passenger can save if he books a taxi directly instead of using Grab when there is surge pricing,” said the young man as he lowered his voice as if to share a secret.

“Shh . . . It’s quite a lot, OK? We did a rough calculation based on the average distance of travel. We found that when the surge factor is higher than one, if a person switches from using ride-hailing to booking a taxi through the taxi operator, he saves about . . . You guess?” teased the young man as he felt Teng’s anticipation.

“10 percent?” Teng hazarded a guess.

“18 percent!” said the young man excitedly and yet trying hard not to raise his voice. “That’s a lot! If your ride cost $10, you’ll be saving $1.80!”

Teng wasn’t quite sure whether to feel good or bad because obviously he’s a beneficiary of increased taxi bookings but he would also have made more driving on the Grab service.

“The good news for passengers though is that only the surge factor during the last half hour or so affects current taxi bookings. So the effect of surge factor is temporary. The impact becomes zero after an hour. This means Singaporeans, especially those not in a hurry, can self-select whether to take Grab or book a taxi if they don’t want to pay unnecessarily more for the ride.

[T]he effect of surge factor is temporary. The impact becomes zero after an hour.

“Or they can wait out till the surge pricing is over. Or use another mode of transportation. After all, Singapore is small and we can go from one place to another using alternative transportation such as the bus or MRT.”

“Wow! So my parents can save 18 percent if they use taxi booking instead of Grab when there is surge pricing. And if they can outwait the rain, the surge pricing will go away after half hour to one hour,” said Teng as he digested the information. “I should tell Pa and Ma this, and even to Siew Ling as I can’t be driving them around all the time.”

Better Prediction

For Teng as a taxi driver, this meant it pays for him to look at the weather forecast so that he can anticipate areas where there’ll be rain and hence increased taxi demand. He’s a bit of a kiasu. So knowing such information before other drivers would give him an advantage. He wished Singapore’s weatherman would provide more granular information on location and time of rain. Then he would be around that vicinity when it starts raining to maximise bookings.

Such information would be beneficial not only to him, but also to the taxi company. If the taxi company could make better predictions of taxi booking demand, then congestion could be alleviated and there would be fewer idle taxis in no-rain areas.

The young man had told him that if a taxi operator could predict demand more accurately by 15 percent, this would lead to an almost 10 percent of additional reduction in vacant roaming time for drivers.

When taxis are better utilised on the roads by carrying passengers instead of vacant roaming, it makes for a greener environment.

The young man had also told Teng that there is a prototype already developed outside Singapore with 500 taxi drivers where recommendations are given by the taxi company on where to drive to for more pick-ups. These drivers experienced almost 30 percent reduction in their vacant roaming time.

“Wouldn’t that be fantastic if my taxi company could give recommendations on where these ‘hot spots’ are? Provided of course they are accurate,” thought Teng.

The Future of Taxis

“What about this new ERP that I hear about?” asked Teng to the young man, who seemed to keep up-to-date on transport matters.

“Oh, that one. Some call it ERP 2.0,” replied the young man. “The toll you pay is based on distance. And I think it uses some GPS system.”

“Doesn’t that mean that when I drive around looking for passengers, it will cost me more if I can’t find one?” asked Teng as he mentally calculated the average distance he drives without a passenger on board.

“That’s right. The new distance-travel toll would put a damper on taxi cruising. If you drive Grab, you know where your next passenger is from bookings, at least for most of the time. Then you’ll be cruising less and save on costs,” rationalised the young man.

“But what about the older people who don’t use Grab? I don’t think they know how to use these ride-hailing apps,” said a concerned Teng thinking of his parents.

“That’s true,” answered the young man. “Young people just use the app instead of flagging down a taxi along the road, even though at times it might just be cheaper to flag down a taxi. It’s usually the old folks who still flag down taxis. I see the demand for flagged-down taxis declining. And with the new distance toll, I think that may further discourage taxis from cruising for passengers, thus making it harder to flag down an empty taxi.”

It’s usually the old folks who still flag down taxis. I see the demand for flagged-down taxis declining.

“Do you think taxis will become obsolete?” asked Teng.

Seeing the disheartened look on Teng’s face, the young man offered some comfort.

“Uncle, look at it positively. Times have changed. I see the new distance-travel toll discouraging cruising. Which means as a taxi driver, you’ll have to be smarter. You have to know where to find passengers easily to reduce the distance travelled. You’ll also need to depend more on bookings for the ‘confirmed’ passenger. If you do this, your earnings will be higher as you drive less looking for passengers. Moreover, you won’t be so tired and you’ll be safer on the road. And think about this – there’ll be less pollution on the road when fewer empty taxis are cruising about.”

Teng had much to consider. His prospects as a taxi driver did not look too promising. He might have to consider taking up a sideline job or maybe even setting up his own business.

WANT TO KNOW MORE?

This chapter is based on Sumit Agarwal, Ben Charoenwong, Cheng Shih-Fen and Jussi Keppo (2019), “Fickle Fingers: Ride-Hail Surge Factors and Taxi Bookings,” Working Paper, National University of Singapore, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3157378

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¹For more on this research on how taxi drivers set targets, see Sumit Agarwal, Ang Swee Hoon and Sing Tien Foo (2018), Kiasunomics: Stories of Singaporean Economic Behaviours, Chapter 2 “Taxi Driver, Where Are You?” (Singapore: World Scientific Publishers). To read the academic article, see Sumit Agarwal, Diao Mi, Jessica Pan and Sing Tien Foo (2015), “Are Singaporeans Cab Drivers Target Earners?” Working Paper, National University of Singapore, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2338476. This research has also been published as a commentary; see Sumit Agarwal and Diao Mi, “Why it’s so difficult to get a cab,” Today, (6 October 2016), https://www.todayonline.com/commentary/why-its-so-difficult-get-cab

²For more on this research on the effects of nearby construction on utilities bills, see Sumit Agarwal, Ang Swee Hoon and Sing Tien Foo (2018), Kiasunomics: Stories of Singaporean Economic Behaviours, Chapter 14 “Mama, Don’t Forget to Switch on the Air-Con,” (Singapore: World Scientific Publishers). To read the academic article, see Sumit Agarwal, Satyanarain Rengarajan, Sing Tien Foo and Derek Volmer (2015), “Effects of Construction Activities on Residential Electricity Consumption: Evidence from Singapore’s Public Housing Estates,” Working Paper, National University of Singapore, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2371314