Tuesday, December 20, 2011

A free market in taxis

Let's try to imagine, based on other experiences with market-provided goods, what a free market in taxis might look like. If regulations were abolished, and anyone with a driver's license and registered car could offer their services, how would that manifest itself? My guess is that it would look something like the following:
  • Taxi companies would come up with unique color schemes to differentiate themselves and reassure customers that they will receive a consistent experience.
  • Taxi companies would compete to earn business, based primary on fares but also other areas such as the quality of the car, cleanliness, the ability to pay with credit cards, etc.
  • Taxi companies releasing mobile phone apps that allow customers to see if there is a cab nearby, schedule a pick up or find out fare prices.
  • Loyalty programs similar to frequent flier miles that could be redeemed for free trips.
  • While branding and a desire to protect the brand image would help assure quality, services such as Yelp could also help consumers make informed choices about which cab companies offer the best service and prices.
  • Last, and most importantly, companies that offer superior service at the best prices will thrive while the rest will go out of business as consumers vote with their dollars.
None of this requires very much imagination, as such features already exist in bus transport and the airline industry.

In contrast to this approach, a taxi "reform" bill has been introduced by the Washington DC city government that would further regulate the industry. As Washington Post blogger Mike DeBonis notes, "It’s not a medallion system exactly, but it’s close. The bill would also allow the commission to set a driver quota."

Keep in mind that the city's Taxicab Commission already sets prices not only for fares, but even luggage and snow emergency fees. The results of this system are predictable, with little effort by Washington taxi companies to separate themselves from the pack in terms of the quality of the cars or amenities offered. If everyone has to charge the same price, and licensing helps hold down the competition, what is the incentive to excel?

The reform bill that has been introduced, meanwhile, would establish an explicit quota to further restrict competition, and also holds out the possibility of a uniform color scheme which would further reduce differentiation among taxis.

An interesting subtext to the taxi legislation is that it has been crafted by Mayor Vincent Gray, elected last year with support from of the taxi industry which was still angry over former mayor Adrian Fenty's decision to abolish the ridiculous zone system and force taxis to adopt meters instead. Having benefited from their support, Gray is now putting forth legislation to line the cabbies' pockets. Indeed, in releasing the proposed legislation the mayor's office specifically said that it will help "protect the livelihoods of the drivers who provide the service."

All of this is exactly as libertarians would predict, with a heavy regulated marketplace producing suboptimal outcomes and the government serving the interests not of consumers, but of a small, organized lobby. And yet, in the current political environment the concept of de-regulation is decried, the free market portrayed as operating at the expense of consumers and government seen as virtuous and well-intentioned.

Update: Stephen Smith looks at recent development in the NYC taxi market, and points to a paper on the impact of taxi deregulation in Indianapolis:
According to the Mayor’s office, within thirty days of adopting the new open entry and price competition ordinance the number of licensed cab companies increased by 50 percent. Fares among the new companies were nearly 10 percent less than those offered by the dominant providers. Customer complaints about poor service directed to the controller’s office dried up. Nearly overnight, dress codes for taxi drivers were transformed from ripped T-shirts and shorts to collared shirts and sometimes even ties. Cabs became noticeably cleaner and more visible on city streets. 
In the four years since deregulation , according to data collected by city officials, the number of licensed companies has nearly tripled from twenty-six cab companies before deregulation to over seventy today. Minorities or women now own more than forty of the companies. Fares average around 7 percent less than before the regulatory changes. The total number of cabs actually on the street at any given time has more than doubled, from around 225 to almost five hundred. Average waiting time for arranged service has gone from forty-five minutes to twenty minutes.
The free market producing superior results to government regulation -- who knew?

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