Future Taxi Deregulation Will Not Look Familiar

Those who have argued for the deregulation of the taxi industry will be familiar with the claim that taxi deregulation was tried in the U.S. and that the results were so undesirable that regulation was introduced. In a recent Washington Post article about ridesharing and taxi regulation, Catherine Rampell states that prices rose in deregulated taxi markets and that the latest calls for deregulation are only the latest in a familiar cycle. However, future taxi deregulation will be different from past deregulation schemes thanks to relatively new changes in technology that allow passengers to overcome knowledge problems that led to price increases in deregulated taxi markets.

Rampell’s article includes some interesting historical insights. Regulations and licensing laws for passenger transport vehicles are nothing new. In the 17th century, Charles I tried to limit the number of horse-drawn carriages in London by passing an order which was ignored. During the Great Depression, some unemployed Americans found a source of income in the unlicensed taxi industry. By the 1990s much of the American taxi industry had been subjected to re-regulation following a wave of deregulation in roughly two dozen cities beginning in the 1960s.

Today, there are calls for the taxi industry to be deregulated amid the growth of ridesharing companies such as Uber, Lyft, and Sidecar. Some argue that taxis cannot fairly compete with ridesharing companies because they are hampered by outdated regulations, and that if taxis were deregulated they would be better suited to compete with rideshare companies. Rampell warns against deregulation, saying that we have “Been there, done that.”

While it is the case that the taxi industry in a number of American cities was re-regulated after a period of deregulation, many of the pricing problems cited as justification for taxi re-regulation are not applicable today thanks to technological advances.

In her article, Rampell links to a 1996 paper on taxi regulation written by Paul Dempsey, a law professor at McGill. The paper highlights an interesting problem that taxi customers face: a lack of good information.

Most taxi customers take the first taxi that appears. As Dempsey points out, it is not worth taxi customers conducting a price or service comparison in a deregulated market:

…consumers buying taxi service in a deregulated market often have little comparative pricing or service information, for the opportunity costs of acquiring it are high.

Taxi consumers do not have perfect information, so it is almost always worth taking the first taxi that appears. As Dempsey notes (citing work by economist Chanoch Shreiber), in the absence of fare regulation the prices of a taxi rides tends to increase:                                                                                                                

… because a prospective passenger who values his or her time will not likely turn down the first available cab on the basis of price, this will have an “upward pressure on the price.” A consumer hailing a cab from a sidewalk has an incentive to take the first taxi encountered, because both the waiting time for the next cab and its price are unknown. Paradoxically, in an open entry regime, prices tend to rise.

Although taxi prices did go up after the deregulation Dempsey discusses, we should not expect taxi deregulation in the future to have the same outcome.

Keep in mind that Dempsey’s paper came out in 1996, before smartphones allowed for companies like Uber and Lyft to emerge as strong taxi competitors.

Part of the appeal of ridesharing is that the apps used by Lyft and Uber customers allow users to overcome the knowledge problems highlighted by Dempsey. Uber and Lyft users can see the location of drivers, and Uber users can estimate a fare before their ride begins. Today, a taxi company could, unlike a taxi company in 1996, develop an app that allows for users to be better informed about fares and the availability of taxi drivers.

However, even if a taxi company were to develop such an app, it would have to compete with rideshare companies. One app that did allow its users to hail taxis, Hailo, was driven out of North America by the fierce competition between Uber and Lyft. MyTaxi, a Germany-based taxi app, is available in Washington, D.C and does allow users to estimate a fare before a ride begins and see the location of available drivers. If taxi companies want to remain competitive in markets where ridesharing drivers are operating an app like MyTaxi may be their best chance of surviving in the long term.

Ridesharing has dramatically changed vehicle-for-hire transportation, and as regulators look to address the rise of the sharing economy we should expect anything but the familiar regulatory cycle Rampell references. Taxi companies are facing strong competition from companies that would have been inconceivable almost twenty years ago, and they have the opportunity to develop products that can address the lack of information which contributed to taxi prices rising in deregulated markets. There may well be good arguments against the deregulation of the taxi industry, but such arguments must take into account changes in technology.