Make the rules or your rivals will: the economics of taxis in New York City

The NY taxi cartel, like a lot of other bad ideas, started during a crisis:

When the Great Depression hit New York and the city’s 30,000 taxi owners couldn’t pay their bills, the city’s impulse was not unlike that of the Roosevelt Administration in Washington: limit supply, so that demand would be adequate to support the suppliers left standing. FDR’s plans were (thankfully) declared unconstitutional, but New York City’s taxi cartel was there to stay. To operate a yellow cab and solicit passengers on the street you need a medallion. And the number of medallions is fixed at 13,237 – roughly 3,000 fewer than in the year (1937) the system was created.

A recent auction of a medallion was $1 million, which suggests the following break-even analysis:.

...let’s say the expected return on a $1 million medallion is seven percent annually (a low figure in light of the risks). To meet expectations, fare would have to be high enough to yield about $200 a day in profits. Yes, that’s right: $200 a day, after netting out the cost of drivers, fuel, maintenance and vehicle depreciation!

Is there any chance of reform? Sadly, the taxi cartel illustrates why it is so hard to undo these regulations:

If corporate medallions are worth $1 million each, the whole lot of them is worth something north of $10 billion (owner-operated medallions are presumably worth less than $1 million). And the owners are hardly likely to give up this unearned, government-defended surplus without a struggle. In any event, there’s no one around willing to give them a fight.

Make the rules or your rivals will: Germany bans Uber

When formulating a business plan, you have to pay attention to the regulatory environment.  Otherwise, your rivals can accomplish through regulation what they cannot accomplish in the market:  From Competition Policy International

A German court on Wednesday banned Uber from running services using unlicensed cab drivers and set stiff fines for any violations of local transport laws by the pioneering online taxi firm. 

Uber, worth an estimated $40 billion making it the world's most valuable venture-backed start-up, has set out to revolutionise local transport services worldwide, from taxis to carpools to fast-food delivery. 

The latest case, brought in the Frankfurt regional court by German taxi operator group Taxi Deutschland against UberPOP, is one of more than a dozen lawsuits filed in countries across Europe in recent months against the San Francisco-based company.

Help make Nashville more efficient

Taxi demand has fallen dramatically in Nashville. The most reliable source of demand is from travelers arriving on planes and drivers will wait 3-4 hours at the airport for a fare. There are five taxicab companies in Nashville, and each company is allowed to have five cabs in the airport queue. So when one of their taxis picks up a fare, the dispatcher sends another company cab to the airport to get into the queue.

So here's a simple policy proposal to reduce the what economists call the "deadweight loss" of waiting in the taxi queue (because no one benefits from this kind of competition). Have each company take turns dispatching cabs from the airport. If a single company had control of the queue, they would not want their drivers waiting four hours for a fare. Instead the drivers would be sent to higher valued uses, costs would be reduced, and perhaps fares would come down.

If you think that this is a good solution, help our city become more efficient. Call Brian McQuistion, Commission Director, and ask him to make the change.
(615) 862-6777 FAX Line(615) 862-6765

Also, if you can think of problems with this proposal, post a comment.

UPDATE: I called the taxi commission and they insisted it was an airport problem; called the aiport, and no one would answer.

Incentives of Ride Sharing Drivers

Back in the old, old days, when you hopped into a cab at the airport and asked to go to your downtown hotel, the cabbie would start out and then usually ask something like, "Have you been to this city before?" If you did not know your way, he might take the long way to increase the miles and the fare. The WSJ is reporting that some ride-sharing drivers are now taking longer routes too. 

Passengers aren't on the hook for the higher fare because they pay a fixed upfront price based on the app's estimate of the ideal route. And while drivers are encouraged to go the most direct route, they can choose to ignore their digital navigators for a route that tacks on extra miles. The drivers' pay is determined by the actual trip's mileage and time, which can vary based on traffic conditions or diversions.

In the taxi example, I quiz students on how taxi companies fixed this 'long-haul' problem. The simple solution was to set the fare to a per mile rate plus a fixed fee. By driving the shortest route, cabbies could save time, pick up more passengers and thus more of these fixed fees. I love that there was a simple contractual change to address the moral hazard problem. In the ride-sharing context, the problem may be too inconsequential to fix.

An Uber spokesman said the company estimates longhauling occurs on less than 1% of trips in the U.S. 

Make the rules or your rival's will: Seattle bans ride-sharing to protect taxis

Seattle is trying to slow down innovation to protect incumbent firms

There's simply no reason for this, other than to protect the legacy taxi providers. If consumers want those app-based services, why are they being blocked? And, of course, because so few cars will be available, those services become a lot less desirable (less likely to have a car available nearby, etc.). The end result is that it sucks for everyone. People wanting to get places will have fewer options. People who might want to earn money as a driver cannot. These new innovative companies are held back. The only "winners" are the current taxi owners who have less competition.

Why are Uber drivers more efficient than taxi drivers?

Marginal Revolution explains why uber's capacity utilization is 30% higher and its miles driven 50% higher than traditional taxis.

Four factors likely contribute to the higher utilization rate of UberX drivers: 1) Uber’s more efficient driver-passenger matching technology; 2) Uber’s larger scale, which supports faster matches; 3) inefficient taxi regulations; and 4) Uber’s flexible labor supply model and surge pricing, which more closely match supply with demand throughout the day.

What causes the wealth and poverty of nations?

Italy provides a fascinating case study. The country has an almost pathological fear of competition, and uses government enforced laws to prevent it.

...Cabs are relatively scarce in Milan, especially at 5 a.m., when [an econ professor] wanted to head to the airport, so he called a company at 4:30 to schedule a pickup. But when he climbed into the cab half an hour later, he discovered that the meter had been running for more than 20 minutes, because the taxi driver had arrived soon after the call and started charging for his time. Allowed by the rules, but to Mr. Giavazzi, utterly unfair.

“So it was 20 euros before we started the trip to the airport,” recalls Mr. Giavazzi, who is an economics professor at Bocconi University. “I said, ‘This is impossible.’ ”

After Professor Giavazzi later wrote an op-ed article, the taxi guild organized protests that had taxis driving around his house, honking their horns at night.  These guilds drive up costs throughout the economy:

“This is a country with a lot of rents,” says Professor Giavazzi, sitting in his office one recent afternoon, using the economists’ term for excess profits that flow to a business because of a lack of competition. “You need a notary public, it’s like 1,000 euros before you even open your mouth. If you’re a notary public in this country, you live like a king.”

THE protectionist impulses of the guilds are mimicked throughout the Italian labor market. The rules are different for small companies, but in effect, people with a full-time job in a company with more than 18 workers have what amounts to tenure, even if they don’t belong to a union. This makes managers reluctant to hire, especially in a downturn. You are stuck with new employees in perpetuity, whether they’re good or not. 

So how does the country survive?  By evading the taxes and regulations.  Economists estimate that 25% of the economy is in the so called "black market."

Change the rules or your rivals will: taxi competition in Nashville

Earlier we blogged about the efforts of Metro City Council to eliminate competition from low price taxi's. This week, a court refused to dismiss a suit challenging the law as anti-competitive.

...the new rules stemming from the Ordinance serve no legitimate public health or safety purpose,” Sharp continued, “and by alleging that the Ordinance was enacted not to protect any such purpose, but rather to protect limousine companies and taxicab companies from competition.”

Score this for Nashville consumers.

John Nash, RIP

John Nash and his wife were killed in a car crash as driver of the taxi he was riding in lost control.

Students of our textbook will recognize Nash equilibrium of strategic games from Chapter 15 and his non-strategic characterization of bargaining from Chapter 16.

Up until Nash's work on the theory of games, all we had were models of monopoly (one firm) and "perfect competition" (many small firms).  This was not very useful because most of the interesting problems arise in oligopoly (competition between a few firms), and Professor Nash gave us a way to characterize competition in this setting.  

Insights from his models have been distilled into advice given to generations of MBA students:

Use game theory to figure out where self interest is taking you; and if you don't like where that is, change the rules of the game.  

Likewise his strategic and non strategic (axiomatic) models of bargaining have been distilled into bargaining insights:

The alternatives to agreement determine the terms of agreement.  

John and Alicia Nash, RIP

Do tourists pay more than locals III?

I am currently visiting Brazil to do some work on a competition issue. My host and I had to travel to Brasilia for some meetings. We landed and he called for a taxi. While waiting, I noticed a long line of taxis waiting for clients and asked why he needed to call. It turns out you get a discount of ~20% by if you know how to order a "radiotaxi," something with which most tourists will be unfamiliar.

Breaking the Taxi Monoply

How fast do profits erode once the entry barrier to Uber is lifted? Enough to dissipate one-third of the value of operating a cab in New York in just two years.

Hat tip: Mark J. Perry

Make the rule or your rivals will: Uber vs. taxis

In the past, we have blogged about how Uber took advantage of inefficiencies caused by taxi regulation to come up with a more efficient way of getting consumers to where they want to go.  Now that the incumbent taxis have fought back, using the regulatory machinery of the state utility commissions, the FTC, a federal agency is pushing back against the state regulators:

• One proposed rule change would create a barrier to the entry ...
• Another proposed change would require ... a specific fixed price.  ..., this change would prevent companies from adopting new forms of variable pricing that might be more responsive to consumer demands for transportation service.
• A third proposed change would...  likely would prevent many consumers from using a smartphone application to get transportation service quickly, especially in downtown and “urban village” areas.

At least one agency of the Federal Government is trying to protect your interests.

DISCLOSURE: I used to work at the FTC.

FTC regulator calls out Nashville

In the past, we have blogged about how taxis use regulation to thwart competition.  Now we have Dr. Mark Frankena, a former high ranking FTC regulator, calling out Nashville (in a forthcoming article in Regulation) for its minimum price regulation (this would be illegal under the antitrust laws if done by the taxis themselves) and for imposing ridiculous cost-raising requirements on limos:

Those anticompetitive regulations have harmed Nashville’s residents and visitors alike, while enabling taxi and limousine companies to earn greater profits.  ... This article tells the story behind those events, and why Nashville is worse off for them.

Although it pains me to have to teach this to my students, it is yet another example of "make the rules or your rivals will"--in this case to raise profit at the expense of consumers.

Call your Council Members and let them know what you think.  I did. 

Regulatory "backdoors": act quickly, ask questions later

One of the recurrent themes of this blog is that firms use regulation strategically, summed up by the maxim, "make the rules or your rivals will." 

When they do, it is sometimes possible to circumvent regulatory barriers with what are known as "hacks" or "back doors."  

Nextel was one of the all-time great regulatory hacks. In the late 80s and early 90s, the FCC’s rules banned more than two cellular operators per city. As Nextel’s cofounder said, “the FCC thought a wireless duopoly was the perfect market structure”. Nextel (called Fleet Call at the time) circumvented these rules by acquiring local (e.g. taxi, pizza truck) dispatch radio companies, which they then connected to create a nationwide (non-dispatch) cell phone service.

 Predictably, the incumbent cellular companies responded tried to block Nextel's entry, arguing that  Nextel’s service would interfere with public safety frequencies and would be too expensive. Uncharacteristically, the regulators (the FCC) decided to let Nextel keep operating:

Nextel grew to become a top five US cellular operators before it was acquired by Sprint in 2004 for $35B. Their service turned out to be cost-competitive, high quality, and safe. The only thing endangered were the incumbents’ profits.

HT:  Lamar