Uber-powerful Monopolies & their Discontents

Apart from controls over drivers and vehicle standards, the size of the industry is controlled by licensing. Each licence also carries the additional restriction that an operator must work within a defined ‘service area’.

Until the recent entry of the Uber ride-sharing service in the market, consumers have been able to choose when they catch a taxi, not what type of service they purchase.

There are around 3,300 licences currently held in Queensland. The value of licences vary across the State. The approximate market value of a licence in Brisbane is $510,000. Licences can be obtained by buying or leasing an existing licence at the market value, or by acquiring a new licence through a tendering process if, and when, one becomes available.

The licensing of taxis restricts supply and creates market power. There are limitations on the industry’s market power as there are substitutes to taxis and the government also regulates taxi fares. Under this type of model the restriction in supply results in increases in licence values. Recently this has been around 4-5% per year. [1]

This rise in market value creates an income for the owner of the licence. The value is captured when the holder of the licence sells it to another operator. Think of it in the same way as a capital gain on the sale of a house; the seller receives a capital gain, and the house must then increase in value for the buyer to subsequently receive any gain. In a reasonably free market like housing people hope to make capital gains, but accept that buying at the peak of the market could result in a capital loss if prices fall and they have to sell.

This is where the analogy with the housing market breaks down. The taxi market is artificial in the sense that it is created solely by regulation. Purchasers of licences should know that the rate at which the government issues licences will affect their licence value.

The other issue with taxi systems is that there needs to be an effective dispatch system to coordinate supply and demand at any time. Coordination would seem to be cheaper by maintaining larger fleets and centralised dispatch systems. Otherwise, there would be a larger number of smaller taxi companies than observed in most cities. The taxi licensing system can operate cosily while there is no effective alternative to centralised dispatch.

The recent rise of ride-sharing network Uber threatens the traditional taxi business model.  Uber operates differently to a traditional taxi service. The smart phone ‘app’ service connects third party drivers with customers seeking private transportation.  Technological advances now mean consumers can order a cab via a mobile device without the need to engage with call centres or support staff. The elimination of these costly investments allows Uber to provide an affordable alternative.

Innovation is a modern day mantra for governments as they seek to set in place policies to improve productivity and community well-being. New business models, such as Uber’s model of using a mobile phone application to coordinate people seeking to offer to drive others for a fee in their car, will be test the extent to which innovation is adopted selectively by governments at the expense of consumer well-being.

Uber’s entry into the Queensland and Australian market has not been welcomed by the taxi industry or the respective state governments. Governments maintain that Uber should be required to meet existing taxi service laws, including driver accreditation and taxi licensing (negating the entire Uber model and enforcing the traditional taxi industry model).

One of the main arguments against Uber relates to its potential to undermine public confidence in passenger transport and increase consumer safety risks. From a consumer well-being perspective, a driver should be safe, courteous, efficient, and charge competitive prices. Criticisms of Uber are underpinned by policy thinking that consumers need government regulation to protect them. However, Uber implements a compulsory feedback system at the end of each journey which is posted anonymously and made available to all potential consumers and drivers. Feedback on drivers in the taxi industry is not as transparent, nor does it operate in real time.

To conclude, Uber presents an alternative to taxi services which will increase competition and lower prices for consumers. The issue for Governments is not so much whether consumers should be given a choice of competition between different types of taxi services, but the consequences for the value of taxi licences if Uber can successfully compete with the traditional taxi model.

However, while Uber will cause some displacement of traditional suppliers, and the consequent reduced demand for traditional taxi services will affect taxi licence values, it is possible that Uber and the taxi industry could coexist. The relative affordability of Uber may attract new customers who are unable to afford taxis at current prices or who previously may have opted for cheaper alternatives such as the public transport network. It may then be the case that Uber’s entrance could ultimately result in a net increase in the size of the market, rather than a straightforward substitution effect, and an overall increase in consumer well-being.

Innovations like Uber can deliver overall benefits to the community but these benefits will affect existing service providers. Rarely will an innovation not have an impact on existing industries. If Governments want to gain the benefits from innovation then they will have to accept that there will inevitably be collateral damage.

[1] L.E.K. Modelling (Queensland Taxi Industry Review Economic Model & Policy Considerations, DTMR, September 2010) http://www.tmr.qld.gov.au/~/media/busind/Taxiandlimousine/Taxi%20strategic%20plan/Pdf_taxi_industry_review_economic_model.pdf