Understanding Pricing and Sunk Costs: My ride to the Airport
My mother came to visit from Delhi, after the visit I had to drop my mother at the airport. We booked an Uber which dropped us at the Departure terminal. After a few last minute checks and exchanges, we embraced one last time, she gave me her blessings and was on her way. Now, it was my turn to book another cab to head back home which was about 5 kms from the Airport. So I checked both Uber and Ola to compare the prices, Uber was the cheapest and price shown on the app was Rs 209, with the nearest cab being almost 7 mins away.
Now, I wondered if I could possibly get a better deal. So I looked around and I saw a lot of Uber and Ola drivers dropping off customers and leaving the airport without any customers on the return journey. So, I thought of seizing my opportunity and asked one of the drivers who had just dropped off a customer if he would be willing to go to my destination. He said “of course”. So I asked how much?
He pulled out his own phone and opened the Uber App, put in the destination to check the fares. The App as expected showed the fare as Rs 209. He then looked at me and said that he can take me to my destination for Rs 150. I without even negotiating further agreed to the deal and got into the car. While sitting in his car and driving out of the airport, I kept analyzing the deal we had just agreed and wondered who got the better deal out of the 2.
From my perspective, I saved 7 mins and Rs 66 by taking the offer, so it seemed like a good offer to accept, unless I was willing to ask around with other drivers for a better deal which may or may not have yielded a better result.
Keeping myself in the driver’s shoes, he got a ride on the return journey from the airport which he normally would not have got and we know that an empty passenger seat is Sunk cost. So something is better than nothing. Also, for the driver, If he had refused to take me, in anticipation of finding another customer, he would have had to first drive out of the airport and wait till he gets another booking, which would have taken time and in his line of work, time does translate into money. So, it was a good deal for the driver to accept as well. So far so good.
However, if you dig a little deeper, if the driver had asked for Rs 208 instead of Rs 150. Did I really have a better alternative? Maybe, I could have asked around with other drivers and tried to get a deal lower than Rs 150. but I also realized that even at Rs 208, I would have saved Re 1 and 7 mins. Something is better than nothing.
So the question I’m left with is, did the driver leave money on the table by asking for Rs 150 instead of Rs 208 or did I pay too much by not negotiating with other drivers. Would you have accepted the ride at Rs 208 ?
Though, the answers might seem obvious or even trivial once we look at it rationally, but human behavior works in intriguing ways which are not always rational.
