May 6, 2015

Taxi marketplaces and competitive regulation

With the coming of players such as Uber and Ola into the local transportation markets, we are effectively seeing “competitive regulation” in the sector.

App-based taxi matching companies such as Uber, Lyft and Ola have never had it easy with regulators. Uber, for example, is banned in a few states in the USA and in countries such as Spain and France. Both Uber and Ola had run-ins with regulators in India after the rape of a passenger in a car booked via Uber in Delhi in December, with several states (including Delhi) threatening to ban such services. As a story in Mint described, regulatory uncertainty meant that TaxiForSure, a competitor of Uber and Ola in India, was unable to raise further funding, and got acquired by Ola earlier this year.


There are several reasons behind the trouble this sector is facing with regulators. Firstly, organised well-entrenched players in the taxi business might capture regulators in order to protect their turf. In several cities, both in India and abroad, there is a cap on the number of cars (or autorickshaws) that can provide taxi services, in return for which taxi drivers accept a fare structure imposed by the regulator, usually a government department. The lobbying power of taxi drivers means that the number of licenses is limited, which allows owners of these licenses to seek rents, the most notorious example being that of a ‘medallion’ (license to run a taxi service) in New York being sold for a million dollars a couple of years back.

With its model which matches users who want a ride with those that are willing to offer a ride, services such as Uber have disturbed this long-standing equilibrium between the entrenched taxi industry and regulators. Consequently, the reasoning goes, the entrenched players are not amused, and they bear upon their regulators, with whom they have built a cosy relationship over the years, to ban the new services.

The second reason why regulators have generally been so ham-handed in regulating such services is that these services are paradigm-shifters, completely changing the contours of the taxi market, and regulators are not prepared for it. For example, following the Delhi rape case in December 2014, several states in India asked Uber and Ola to register themselves as “radio taxi companies”, under a model that was prevalent in the late 1990s. Regulators have failed to understand the Uber/Ola model of instant matchings, innovative price structures, part-time drivers and dynamic pricing, and have thus pigeonholed them under regulations that regulators understand well, like the radio taxi regulation, which apart from imposing both a floor and a cap on the prices, regulates trifles like the colour of socks the drivers need to wear.

While both the above reasons are plausible, neither is particularly compelling. While it is definitely true that the existing taxi industry is threatened by the entry of these app-based marketplaces, there is no compelling reason as to why the regulators should stand by the incumbents, with whom they have had several run-ins over the years. Similarly, not coming to grips with the business model does not necessarily mean taking a hostile stance. There should surely be a stronger reason that so threatens the regulators. How about the idea that the likes of Uber and Ola are a threat to the regulator themselves?

“Competitive government” has long been a libertarian dream. The argument goes that there is no reason why citizens should be ruled by the same government solely because of the geographical accident that they are neighbours. Pretty much everywhere, people don’t have the choice of government. While they may have the right to vote and help decide who governs them, ultimately their geographical residence determines who governs them. This, in effect, gives governments a monopoly over people living in the geographical area they rule over, and short of migrating, there is little that citizens can do to change their governments.

In a “competitive government” setting, there are parallel governments that rule over the same area and people can choose which laws they want to live under. That way, if people don’t like the laws made by the government they are currently governed by, they can choose to switch allegiance to another government which is operative in the same area. In other words, this implies an end to the geographical monopoly that governments have over the people they govern, and gives people greater choice.

It is not hard to see, however, that while a system like this is great in theory, practically it is quite unworkable. For example, if there are two governments we can choose from, and a person chooses one and another person (belonging to the same family) chooses the other, whose laws will prevail in the particular household? What prevents people, after a crime has been committed, to ‘convert’ to the government that imposes the lesser punishment for such a crime? Which government is responsible for providing public goods? There is a reason that this libertarian dream has remained just that.

While a broad competitive government might be unworkable, there is nothing to stop this concept from working in specific instances, or parts of the economy. With the coming of players such as Uber and Ola into the local transportation market, what we are seeing is effectively “competitive regulation” in the sector. In other words, the regulator has competition.

In the traditional taxi model, the regulator is a monopolist. Any driver who wants to offer taxi services or passenger who wants to avail such services should obey this monopolist – that is the only way to do business. If a taxi driver thinks the current fare structure is too high (as a consequence of it his volumes suffer), he has no option now but to petition the monopolist regulator, and if his petition is turned down (as is most likely), either continue to be in the business at the current regulated fares or move out. Even when a driver and passenger agree that a particular fare structure is suboptimal for both of them, they have little choice but to obey.

By providing alternate fare structures and rules of engagement from what the existing regulator is offering, marketplaces such as Uber and Ola are actually acting as “competitive regulators”. In other words, within the limited confines of the transportation market, Uber and Ola are offering “competitive government”.

Note that this obeys all the conditions for competitive government and gives full freedom to its ‘citizens’ to switch. For example, nothing prevents drivers from installing apps of more than one aggregator (regulator) and dynamically choosing which regulator they want to be regulated by, by switching on the appropriate app. It is even more common for passengers to have multiple apps installed and choose the one that will give them the best deal given the combination of their current day, time, source and destination. From the time the marketplace matches the driver and passenger, till the end of the trips, both are governed by the regulations imposed by the marketplace which is governing their current trip. Once the passenger gets off, however, both passenger and driver are free to choose which ‘regulator’ they want to be regulated by next. A dream come true for choice, and drivers and passengers, but a nightmare for the incumbent monopoly regulators.

In this context, there is little wonder that incumbent regulators are being hostile to these taxi marketplaces regulators.

Photo: Craig Cloutier

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