Unfortunately, with lots of recent transportation debate on Commercial Ride-Sharing, the lack of attention to the underlying economic theories that underpin competitive forces, regulatory dynamics, and innovation cycles is bit surprising.
First off, possibly we could start by explaining why taxis are regulated in the first place. Well, the theory identifies that where industries have a continuously perishable product (i.e. empty seats) and very low marginal costs of production at the point of service delivery, this quickly leads into destructive and fatal competition, primarily for those operators with shallow pockets. The need for both the federal and provincial government to intervene significantly with serious regulatory tools into the Port truckers dispute tells us that caution is needed before the regulatory model in transportation service provision is completely abandoned as UBER, et al, wishes us to think is acceptable.
And for further illustration, I’m currently teaching a transportation economics course this week on the other side of the planet where we use a case study from another transportation sector on exactly this subject, and what happened when the regulator failed to engage to prevent a multi-national corporation and with its deep-pockets to drive competitors out of business, and then just like the theory predicts, the remaining operator restricted output and consequently increases prices, and with the very public threat to new entrants that dare you re-enter and we will squash you too!
And so how does the theory fit commercial ride-sharing such as UBER, Lyft, etc. Well, as I have been working recently with the San Francisco airport, I have learned that the taxi industry in San Francisco has been so damaged by this destructive competition that the local market is now dominated by these commercial ride-share services – well, recent public reports indicate that UBER with its vast knowledge of local travel demand patterns, that are aggregated globally to develop aggressive strategies to generate revenues, NOW includes the practice of REMOVING capacity at SURGE times that given the UBER dynamic pricing model means paying WAY more during peak times when few alternatives exist, and with the few remaining independent operators daring not to challenge UBER in any event given the public threats of economic retaliation.
This is exactly what theory predicts will occur without a regulator ensuring market abuse does not occur – in this case, the theory in perishable markets says early predatory pricing will eventually lead to market concentration, especially where market discipline can be enforced through future threats of devastating competitive response. Might sound bit academic, but where is the theoretical analysis advanced in support of Commercial Ride-Sharing that discredits the need for economic regulation in this industry?
And while I fully support disruptive technologies, having lead my own major international program of transportation system change, such tools are no excuse for avoiding the necessary public debate on what will arise over time with their implementation. Let’s have the debate and see what works best before the taxi rules are just thrown out for sake of expediency and lack of willingness to see the many sides of this complex picture.
So from a practical perspective, for those who support Commercial Ride-Sharing, let’s consider the provision in the Vancouver Taxi Licensing bylaw that says NO OPERATOR CAN ACT AS A PUBLIC BUS SERVICE. If the Taxi regulations mean nothing to UBER, what will stop them next from just ignoring this other bit of the Taxi bylaw.
Well, if I was preparing the long-term transportation investment strategy for UBER, I would consider the real ECONOMIC prize is NOT the rather expensive practice of driving automobiles around to pick-up individual travelers, but instead to buy a bunch of cheaper passenger vans and then CHERRY-PICK high concentrations of travelers on the most lucrative transit bus routes. What an easy thing to do with an APP that says “I’m at this location, and is anybody else going to this destination soon” – well, UBER already has this APP and is offering quasi-bus services in limited US markets where no incumbent transit operator exists – but UBER is not going to wait long before it goes after trunk bus services where the pickings will be remarkably easy and highly profitable by avoiding the provision of services to those transit users who get considerable public subsidies now.
This ultimately would then leave the Transit system with the unenviable task of continuing to serve a regional network but without the revenue advantage of carrying lots of travelers on short-haul routes that make significant profits that overcome the many loss making routes. If you think the TransLink funding and referendum debate are a challenge now, wait till Commercial Ride-Sharing starts taking a huge revenue chunk out of expected revenues. And how will the Transit Drivers Union respond to an advance by UBER into their very protected market – the 2001 strike might start to look like a cake-walk.
So before everybody jumps on the Commercial Ride-Sharing band-wagon, maybe, just maybe, some considered thought is needed on how best to evolve what is plainly evident as a broken model – but just to throw away the economic regulations with the dear hope that the invisible hand of the market will just sort all this out is NONSENSE. Even market advocates such as myself understand the many market failures that can occur, and thus are supportive of SMART regulation.
Dr. Joe Sulmona
jsulmona@telus.net
Joe, insightful as always…
Are you suggesting to disallow any competition ? Or just regulating it better ? When does regulation hinder progress and is just another tax ?
The idea that regulated taxis or buses are somehow better is incorrect. They come at a higher average price, ie another tax.
Also, the idea of paying more for cab or Uber rides in rush hour also makes sense. Isn’t this the whole idea of road pricing, to reduce congestion. Make high use so expensive so that traffic flows, even at 5 pm.
Clearly regulation has its place, but in many cases it stifles innovation and new competition to arrive at lower prices. TV and Internet also reduced radio, ITunes reduced Cd sales and CD sales reduced tape sales. Is this not what we see here with Uber ? What is wrong having a private bus taking 10 passengers than TransLink bus ? Competition is healthy, or are you saying it is not ?
Only tape players allowed as CD players surely threaten the tape industry ?
Mr. Beyer,
Apologies – have been travelling so please excuse delay with further input.
Your absolutely correct about the often “dead-hand” of regulation, as well as the need for action on the broken Commercial Ride Sharing model that both I and others advocate for. At the same time, only in the THEORETICAL world is it possible to have the complete absence of regulation under the condition of PERFECT competition. Thus, we must account for the “Theory of the Firm Under Regulation”, which is well-trodden and pretty well explains market structure, strategic firm decision-making, market failures, regulatory responses, etc… Some posts also expressed interest in perishable markets, such as For-Hire transportation services, so plenty written on these subjects within the above noted theoretical framework.
You are also correct that some forms of regulation can severely hinder innovation, especially around market entry, which is what the UBER-style operator debate generally centers around. Yet, I would be remiss to ignore that unfettered market entry without including stringent public policy oriented operating conditions can lead to some very serious negative externalities, including tragically what we saw in India last week. I wish the family well for what will be a life-time ordeal allegedly at the hands of an improperly scrutinized driver that UBER admits was their failing to permit engagement in their service. This is not to say that this alleged event only happened because of UBER’s involvement, but rather just to illustrate that both regulation and the relevant enforcement model have a serious place in society that we ignore at our peril. However, the suit just filed in the Superior Court of California, County of San Francisco, specifically alleges the UBER has acted in a fraudulent manner with regards to portraying its security screening process, and other matters that, while yet unproven, demonstrate the need for caution in how we advance on For-Hire Service innovations.
http://webaccess.sftc.org/Scripts/Magic94/mgrqispi94.dll?APPNAME=WEB&PRGNAME=ValidateCaseNumber&ARGUMENTS=-ACGC14543120
The challenge is how to encourage innovation, yet establish reasonable limits to the potential ravishes of market failures – I have the good fortune to work in various transportation sectors across the globe with various best-practice regulatory models that could be useful here in B.C., but this will require acknowledgement that the current model needs attention, and more importantly that the various stakeholders will be accommodating of change – no small order. Plus, some will attempt to discount potential for innovation, or take the position that existing transportation providers (e.g. public transit) will not face competition from these new service offerings. As such, if UBER (and others) are permitted to enter the Public Bus market they will eventually create serious competitive offerings such as already in successful operation. For example, see link for UBER offer to their frequent customers that can easily incorporate the ability to attract frequent transit users on a monthly or even yearly basis
(http://blog.uber.com/2013/02/07/introducing-uber-perks-our-corporate-benefits-program/).
And for achieving Public Bus flexibility, you are also correct that different operating models might be more affordable than running 40 foot diesel buses empty for good chunks of the day – yet, the reason I refer to the 2001 bus strike is the difficulty of attempting to introduce flexible labour practices is not a one-sided debate – and best dealt with at the bargaining table, rather than government just throwing out regulations that will most certainly lead to serious labour strife. And this equally applies to the existing taxi regulatory system – yes the model must change as we can see from proposals from authorities in both New York and Chicago, but if we wish to retain innovation cycles that involves risk-based investment, then recognizing the role of historical regulatory models and their transition needs respect (albeit not necessarily protected in perpetuity). Those wishing to strip capital arbitrarily from incumbent operators arising from regulatory failure and admittedly even “regulator capture” techniques is not likely to entice future investment cycles as the message becomes watch out for sunk cost capital risk regardless of whether the investor follows the rules of the day.
http://bits.blogs.nytimes.com/2014/12/11/chicago-and-new-york-officials
With regards to surge pricing, yes it would be agreeable conceptually that such a method would support dealing with peak traffic delays, but UBER et al do NOT use this method during traditional peak operating hours. UBER Surge Pricing is primarily used when the fewest alternatives exist such as late nights when bus services become dormant and typical car-pool arrangements associated with journey-to-work trips are no longer available. In fact, surge pricing won’t work well during the day when many more alternatives exist and huge volumes of commuters will simply adapt/demand cheaper options. An UBER insider in the link below even admits surge pricing is only used for about 10% of trips – but the rub is the time of day when these heavily priced trips generally occur, and he admits this too. As seen elsewhere, this issue also raises practical concerns on whether efforts to reduce drunk-driving might be undermined when Surge Pricing occurs at the very time we need to encourage partiers to plan to stay off the road.
http://abovethecrowd.com/2014/03/11/a-deeper-look-at-ubers-dynamic-pricing-model/
http://www.businessinsider.com/uber-new-years-eve-surge-pricing-2014-1
What is also poorly understood in the general public is the PUBLIC SERVICE OBLIGATION (PSO) that comes with the Market Entry barrier for the Vancouver taxi industry.
> (10) Every holder of a license for operating a taxicab shall be available for hire for a period of not less than 10 hours in each 24 hours, and for not less than 6 days in each calendar week.
>(19) No owner or driver of a taxicab, but not including a dual taxicab, shall refuse or neglect to convey any orderly person or persons upon request in the City unless previously engaged or unable [generally by way of vehicle in for emergency repair] or prohibited by the provisions of this By-law.
http://vancouver.ca/docs/bylaws/6066c.PDF
What ultimately this means is that regardless of whether the minimum 60 hours/week are profitable periods, the taxi must be on the road and must NOT refuse pick-ups (albeit policing this is a challenge), plus the Bylaw also requires weekly records from the mandatory electronic meter system to be filed for audit purposes. This on-road PSO is part of the counter-trade for market entry protection, and in the absence of the minimum road time, then the Market Entry limitation would create serious problems for available capacity. Also, taxis are currently exempt from competition regulators pursuit of price collusion charges because an outside regulator sets their prices and service levels – but this does not apply to UBER desiring to work in a supposedly open market (but as abundantly evident in other transportation perishable markets the potential for electronic price collusion is way easier to do than the manual kind) – and clearly this rent-seeking behaviour is another source of market failure, and in itself applicable for regulatory action should the primary objective of destroying competitors for the purpose of lessoning competition (known as predation) become known and sufficiently proven.
YET, UBER style operators expressly wish to do away with both these bylaw requirements so they can operate whenever they please and at whatever price the market will bear – and they also wish to withdraw service at their sole discretion at any time if the fares fall below their costing model, or now evidence exists they withdraw capacity during some peak periods so they can SURGE price the remaining limited availability. City taxis cannot charge a different fare depending on demand as these are fixed to avoid exactly this kind of dynamic pricing (some might say GOUGING) – should this change, maybe, but let’s have the debate first.
In sum, you are warranted to call for innovation in this market, but the manner to achieve lasting Consumer Surplus is best through vigorous public debate about merits/dis-merits, rather than capitulating to the views of those who wish we completely ignore potential for damaging externalities, and without hesitation sail into uncharted and possibly mined waters without a compass or even a semblance of a map.
I also applaud your willingness to debate this topic in public, as the question also arises that for those who have a fiduciary interest in new For-Service Hire innovations, using this post to advance supportive views without declaring their identity is certainly a known communications strategy.
Joe Sulmona
I hadn’t considered that taxi regulations might actually serve an economic purpose besides simply generating rents for a politically connected group. I wonder if there is a paper which really makes the case that “where industries have a continuously perishable product (i.e. empty seats) and very low marginal costs of production at the point of service delivery, this quickly leads into destructive and fatal competition”. Maybe something that builds a model, kind of like Akerlof’s “Market for Lemon’s” paper?
Dr. Sulmona refers to “the” theory – what theory is that exactly? I’d like to read it.
The idea that Uber will skim off a large proportion of transit users on Trunk routes that now get subsidies, is paranoia. Those subsidized riders will have monthly passes and will stay with transit rather than pay twice.
New technologies will continue to disrupt traditions. De-regulating of telephones and airlines were just a couple of the starts. There is no going back. Vancouver is a perfect market for a Uber system, not enough cabs when needs are high and regional turfs. No flexibility in the system now.
Indeed. Perhaps Translink owned cars, buses and minibuses become the largest Uber users ? Surely it makese more sense at 10 pm to have a minivan serve a remote region rather than a scheduled bus every hour with 1-3 passengers, or often none ?
First off, possibly we could start by explaining why taxis are regulated in the first place?
Joe salmuna has an explanation. there is some other:
At the beginning, any trade was regulated by guilds, and that included the trade of transporting person.
This trade as as patron St Fiacre, eventually because a guy living rue St Fiacre in Paris is considered as the father of the cab business, (more here .
So let see what happened from there:
In France, the revolution was supposed to abolish the guilds in 1789…but it quickly appeared some found unpleasant the idea that anyone can venture in any business, such as the medical one…so very quickly some guild was reestablished in the name of the greater good, with their numerous clausus to ensure a comfortable living for the said trade, in the name to have competent people.
After the revolution, Parisians bourgeois was not impressed by their fiacres: driver was unreliable, fiacre dirty smelly and dangerous…, Worst of it, the idea to have to discuss price for a trip, from a weak position (when the user need it) was really unpleasant – so in 1855 Napoleon III (or Haussmann) will create a monopoly (Compagnie Imperiales des voitures), which was able to grant a certain level of service – at least the bourgeois could travel in style (*) like the noble before: That was great!
(for good measure the Paris Public Transit company will be created the same year).
In a liberalization effort, the company will lost its monopoly circa 1866: not too much happened after, but circa 1890, some companies started to manufacture some very expensive self propelled fiacre, also called “automobile”…
Obvioulsy very few were able purchase such things, which anyway were of no use most of the time…but some smart businessmen like Renault found out a good idea to enter the taxi market (the society called G7, still today detains 70% of the Parisian taxi market…)…So at the beginning taxi driver are the employee of “big” businesses (from 1918 they will have to wear uniform, and even pass a driving licence!) – as employees, they have create their union too…
In the 30’s, automobile had became more affordable and more people bought automobiles for themselves, but with the depression, many of those found a good idea to use their car to offer taxi service to make end meet (doesn’t it sounds like Uber).
both the big businesses and unions didn’t like that…but the public was not necessarily either pleased by the resulting lack of service consistence that inferred of that new competition (so back to the original reason why the Fiacre business got regulated in 1855)…!
Parisian taxi became regulated again in 1937 but it never recovered the quality of service which once make famous the Parisian cab. London, spared of nasty liberal revolutions, has got its cab business continuously regulated since King Charles declared in 1637 that just a few hired coaches were so “very requisite for our Nobility” that “there should be a small competent number allowed for such uses.”. That said “pre-booked” services (e.g. Uber) are not concerned by this regulation in London like in Paris: last time I have checked it was still plenty of black cab up to the standard justifying their high reputation.
New York regulated its taxis in 1937 for pretty much the same reasons as Paris…and most of the NA did around the same time for more or less similar reasons.
By that time, The jitney was already outlawn in France… under pressure of the railway and tram companies which hadn’t foreseen such competition when they were expecting their late 1800s rail investment to payback for 100 years…
That will not prevent them to go bankrupt, and with the nationalization of transportation, and burgeoning idea of transportation as a “public service”, it appeared that regulation on jitneys was a good idea too for reason exposed by Joe, and the mass passenger transportation business became essentially a matter of public monopolies.
In the 1980s, some people was fairly unpleased by this state of affairs:
those monopoly businesses was all plagued by declining ridership, requiring ever more subsidies, and some started to explain all that was due to lack of competition.
In Europe, UK started to break that…results was not necessarily as good as expected…but some people found that deregulated coaches services was offering better services than the moribund British Railway ones at a better price point: as a result people was traveling more (what is considered good for the economy). It also quickly appeared that the privatized British buses had better productivity (in term km/bus cost/km) than before. Some was even finding that private buses company were making effort to meet and attract the customer demand!
Continental Europe has since tried to rip the benefit of competition, without losing the public service idea people get accustomed too, so it has a slightly different model which has since been adopted in London and is also roughly the one of Hong Kong:
public transit network are increasingly delegated to private companies (a sort of PPP a la Canada line)…RATP, the historic Parisian bus operator, operates some London bus routes, but all that is transparent to the user (The London RATP route accept the oyster card…), except that to win the contract, the private operator has demonstrated it was able to offer a better quality/cost compromise than its competitors.
Ride sharing:
In France, in the late 80s (eventually thanks to a device called Minitel, which was used before internet made it obsolete), car pooling became very popular:
nowadays blablacar is the main provider of such service in Europe.
Notice the difference with Uber: basically blablacar doesn’t pay enough the driver to justify the trip if the driver doesn’t need to do the trip himself…but the impact on other form of transformation is pretty much the same:
French railways SNCF complained of lost business to blablacar (and reduction in car travel/km is also attributed to it), but it seems that such service, requiring to “pre-book” the ride and involving minimum fare, doesn’t match the convenience to walk to a bus stop with service certainty, to be a meaningful threat to transit. It could be quite the opposite in fact: A lower reliance on car ownership; allowed by ride sharing or car-sharing for that matter; is conductive of greater transit use.
The theory
The theory Joe develops suppose that one can establish a “natural monopoly” to control the offer…but to establish a “natural monopoly” suppose to be protected of competition by high entry barrier; typically large fixed costs or economies of scale: there is no such things in the ground transportation business.
The real reason why we have specific regulations in the ground passenger transportation market, be for bus or taxi, is not economic (beyond public safety issue), but politic:
running unprofitable transit routes is a political choice and cross-subsidizing transit routes is another political choice
As a society, We eventually value the comfort to be able to board the first bus or cab showing on the block without wondering whether there is a better deal coming up on the next block or later: it is an aspect of our life where we have little appetite to spend time at shopping around when we are on the street, in a demanding position, rain or shine.
travel in some countries, mainly in the less developed world, and you will find lot of people competiting for your transportation need, sometimes even harassing, often providing sub-standard and/or random service (“the minibus will leave when it will be full”) and almost always requiring price negotiation. It eventually helps to better appreciate why we should value the above
Our regulations should just try to reflect that.
(*) notice that an important key to the Uber success, especially vs his direct concurrent Lyft, has been to democratize this “travel in style” experience (otherwise more expensive and/or complicate to access)
Thanks Voony, for the very interesting historical account.
The way our leaders are flatly rejecting Uber for not being in alignment with current rules is extremely short sighted. The government is being lazy and not doing their job. The dangers of deregulation cited in this post are valid, but when faced with new technologies, and new realities that impact existing legislation, the government is obligated to reevaluate the situation, not simply say “no no no” with their hands covering their ears.
The government needs to look at our current rules with an open mind and a fresh sheet of paper, starting from the point of view that our current system is broken. The public opinion on this issue is very clear that the status quo is not working. The government needs to investigate how we can accommodate new technologies and methods of travel while still retaining the features we like from our current system.
Instead of this we’re seeing an absurd hardline approach against Uber from Todd Stone where undercover operatives will catch Uber drivers. Our leaders are approaching Uber like an over eager strata council president, excited to play police officer and watch hours of CCTV footage to find out who is making the garbage room messy. A preoccupation of catching rule breakers over consideration of whether the rules may be terrible and need to be broken is a sign of misguided policy. It’s a shame to see it from both BC Provincial parties.