Ohrn Words: Uber Pro and Con

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.