The sharing economy: To deregulate or to reregulate

The sharing economy: To deregulate or to reregulate

Phuah Eng Chye (11 November 2017)

In response to the disruption from ridesharing, many studies were commissioned to assess policy options. The core of the debate revolved around whether it was preferable to deregulate or to reregulate the taxi industry with an analysis of policy options for entry regulation, fare regulation and service standards.

The deregulation argument is straightforward. Multilateral organisations such as the OECD or the EU are committed to publicly supporting competition and argue that loosening “supply restrictions on taxis…strongly positive, with reduced waiting times, increased consumer satisfaction and, in many cases, falling prices.” Hence, they conclude that “rules restricting competition between taxis and hire cars have a negative impact on the price and quality of services and should be subject to scrutiny by competition authorities and transport authorities to ensure that the public interest of urban mobility is fostered in the best possible manner.”[1]

In connection with this, concern is expressed that “restrictions on entry to the taxi industry constitute an unjustified restriction on competition. Regulatory capture frequently means that these restrictions lead to large transfers from consumers to producers, economic distortions and associated deadweight losses.” In addition, “high licence values reflect the substantial and increasing monopoly rents that can be accrued from the exploitation of increasingly scarce taxi licences. Rising licence values represent continuing and increasing transfers from consumers to taxi licence owners as a result of the policy of supply restriction.”[2]

Once high taxi license values had been established, regulators would need to manage the severe consequences when the value of licenses fall. “In particular, there will be taxi drivers who saved for many years to purchase their own plate and commit to the business. These individuals may see their life’s savings, and retirement plan, threatened.” [3]

The deregulation arguments have been challenged on empirical grounds. Bruce Schaller notes “oversupply, congestion, price gouging and poor service led cities across North America to impose entry and price controls on taxicabs in the 1920s and 1930s… The regulatory structure established by virtually all major U.S. cities in the 1920s and 1930s was successful in the sense that problems of oversupply, price gouging, lack of insurance and chaotic street conditions abated.”

He adds “selected cities experimented with deregulation in the 1970s and 1980s, but experienced similar problems and most re-instated entry and price controls. This is not simply a historical problem. Oversupply is evident today in Las Vegas, which lifted limits on fleet sizes in late 2015. In the first six months of 2016, trips per cab were down 42 percent from a year earlier as overall ridership fell while the number of cabs nearly doubled.”

Bruce Schaller’s view is that “the discussion of deregulation focuses most acutely on limits on entry and fare-setting. Should existing taxi companies be allowed to expand their fleets and set their own fares including surcharges during peak times? Should new companies be able to freely set up business? Should taxis be able to pick up passengers outside the city or county where they are licensed?” While these were “important issues, essential to fair competition between taxis and Transportation Network Companies (TNCs) such as sharing platforms as they seek to compete on the basis of quality, price and services offered.” Unfortunately, the regulatory options tend to be wrongly framed in TNC versus taxi which leads to the “wrong set of policy choices”.

Hara Associates suggests the failure of deregulation could be due to the “unique role of vehicles-for-hire as a residual employer.” Hara Associates explains “the taxi industry experiences economic recessions differently from other industries. In most industries, supply will tend to contract along with demand during a recession. In the taxi industry, supply expands during a recession, even as demand for taxis shrinks. In the absence of regulation, the industry is easy to enter for anyone with a vehicle. The result is a flood of entrants. Income for each taxi falls as more vehicles share less revenue…economic recessions may cause excessive new entrants, unsustainably low driver incomes, public protest, poor service, and risk to public safety. Without entry management, the excess entry risks will result in pressure to close the industry again.”

In these industry studies, it is possible to detect an element of industry pressure to defend employment/income and to protect the value of licenses. However, the use of (entry and fare) regulation to counter (down) business cycles are inefficient and perpetuates problems of its own making. For example, expensive license values imply the need to embed a capital return into fares. Eventually the wedge between “market” and regulated fares will widen and the industry will become increasingly inefficient. Protectionist policies have generally failed. The taxi industry is no exception in that the traditional taxi industry paradigm is generally regarded as inefficient. Perhaps the case against deregulation could only be justified on the basis that it could make things worse.

However, analysing policies within the traditional deregulation-reregulation paradigm tends to trap conversations and policy decisions within legacy disputes and organisations. The policy conversation is distracted by discussions on entry restrictions, segmentation, price regulations and competition and the aggressive tactics of ridesharing platforms. It will miss the point that much of this discussion is irrelevant because it will not be possible to defend capital values or assure income in an industry that allows the tapping of part-time resources and labour and dynamic business combinations. Most of all, the deregulation-reregulation paradigm does not provide good guidance to addressing the challenges of the future.

References

Bruce Schaller (20 September 2016) “Unfinished business: A blueprint for Uber, Lyft and taxi regulation.” Schaller Consulting. http://www.schallerconsult.com/rideservices/blueprint.pdf

Hara Associates (10 October 2015) “Taxi Economics – Old and New”. City of Ottawa Taxi and Limousine Regulations and Service Review.  http://documents.ottawa.ca/sites/documents.ottawa.ca/files/documents/otlrsr_taxi_economics_en.pdf

Organisation for Economic Co-operation and Development (October 2007, revised 8 April 2015) Roundtable on Taxi Services Regulation and Competition held by the Competition Committee. http://www.oecd.org/daf/competition/41472612.pdf

Simona Frazzani, Gabriele Grea, Alessandro Zamboni (26 September 2016) “Study on passenger transport by taxi, hire car with driver and ridesharing in the EU Final Report”.  https://ec.europa.eu/transport/sites/transport/files/2016-09-26-pax-transport-taxi-hirecar-w-driver-ridesharing-final-report.pdf

Tags: information society, Phuah Eng Chye, sharing economy, taxi industry, fare regulation, entry regulation, deregulation, reregulation, Hara Associates, OECD, EU, City of Ottawa, Bruce Schaller

[1] See Simona Frazzani, Gabriele Grea, Alessandro Zamboni.

[2] OECD.

[3] Hara Associates.

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