TCS Daily

Fare Trade

By Benedikt Koehler - June 14, 2004 12:00 AM

Need a ready-made image encapsulating the message, "This is London"? Along with Tower Bridge and Big Ben most people will pick a Black Cab. Taxis may be a traditional fixture in London's cityscape, but they also exemplify Britain's booming service industry. According to the Office of Fair Trading, Britain's competition watchdog, taxis are the fastest growing sector in the country's transport sector. In ten years turnover has been up by 43 percent to reach £2.2 billion. And that's not even counting custom from tourists and busy investment bankers in a hurry to their next appointment. Taxis are big business.

The OFT thinks the taxi industry could be doing even better, if only it opened up to deregulation. Taxi markets in most of the UK, as in many countries in the world, operate under a strict regime of regulations ostensibly designed to protect consumers. Licensing authorities set fares and restrict quotas on the numbers of taxis plying for trade. The rationale for these regulations is that fixed taxi fares ensure drivers cannot exploit passengers, and limiting the quota of taxis prevents price wars and market overcrowding.

Not so, say critics, who argue that the taxi sector is a prime example of regulatory capture -- regulations which benefit sellers, not buyers. They point to the prices which taxi licenses command on secondary markets. In Cambridge, for example, a taxi license changes hands at £50,000. In Milan, the going rate is close to €100,000. This is small change compared to New York, where a taxi medallion is worth $300,000. The value of a medallion in the Big Apple has been increasing by an annual average of 13 percent since 1937, much faster than the Dow Jones average. No doubt taxi owners have a vested interest in regulations protecting their investment.

So, if a taxi can be worth this much money even if its parked in a garage, critics think they have a case in favor of increasing competition. The OFT agrees, advocating to lift restrictions on numbers of taxis and to permit flexible pricing. Taking these steps would benefit consumers by allowing more cabs on the road and incidentally curbing the sprawl of the underground economy in unlicensed and uninsured chauffer services.

The taxi deregulation trend in Europe began in 1990 in Sweden. Since then, the Netherlands and Ireland have followed suit. Sweden led the way by introducing competition to dispatch centers so customers can compare prices before they book a ride. Also, corporations in Sweden are free to negotiate fares for block bookings. In the Netherlands, where 90 percent of the population lives in cities, taxis are a key element of urban transportation. Fares, formerly fixed, have been commuted to maximum fares. Dutch taxi licenses now are valid all over the country, when before drivers could only compete locally.

Liberalization in Ireland has been especially interesting. When deregulation took effect in 2000, the number of taxis practically tripled. The corollary was that the pre-deregulation value of a Dublin taxi license, some €100,000, disappeared overnight. An aggrieved taxi owner sued the government for compensation. The case was dismissed. The court held that licenses had not contained any intrinsic economic value in the first place; the real prop for prices had been regulatory restrictions on competition.

Now the deregulatory genie is out of the bottle, it will not go back in. In Germany, for example, the regional government of Saarland shocked traditionalists by scrapping the obligatory color for taxis. The distinctive color made it difficult for cabbies to sell their cars on the second hand market. Who would want to buy a car which could be confused with a cab? Sellers either had to invest in a new layer of paint or sell their car at a discount. In Germany and elsewhere, further suggestions for innovation include calls to drop bans on advertising. Another is to allow a new tier of taxis, two-seater cars charging lower rates. And in France, where taxi markets operate under strict regulations, there have been calls to examine the competitive constraint on taxis from state-subsidized buses. If buses receive subsidies, why not taxis?

At stake in this debate are the same concerns facing regulators everywhere: the competing claims of producers and consumers, and the need to create a framework for market clearing. In Europe's single market, news travel fast which markets work best.

The author is studying economic regulation and competition at City University in London with a focus on taxi markets.


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