When Competition Causes an Industry to Collapse

By | 2018-02-13T21:27:20+00:00 February 13th, 2018|
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Last week’s New York Times carried a story about a taxi-cab driver named Doug Schifter who committed suicide. The Times wanted to dramatize the despair and depression many in Schifter’s industry are suffering as a result of from the bottom dropping out of it with the rise of ride-sharing companies.

There’s no question but that ride-sharing companies such as Uber and Lyft have been bad for taxi drivers, and I mean that sincerely. They’ve seen their fares undercut, which means fewer rides. It makes it harder for people who’ve been cabbies for a long time and are good at it to continue to support their families, which is what led to Doug Schifter’s despair.

As is often the case with incumbent cartels, they protect the immediate interest of their members, but make the ultimate reckoning far more shattering than it has to be.

What they forget is that the reason people fell in love with Uber and Lyft was that they hated the cab companies so much. I didn’t use taxis much when I lived in D.C., but when I moved out to Denver, I had an unfortunate accident in which my car was totaled by an oncoming driver. So for a while I was dependent on cabs and buses. Rides were not only expensive, they were unreliable. I found myself resorting to calling two cab companies hoping that one showed up. That worked until the two major companies—both owned by the same parent corporation—figured out what I was doing.

In some cities, the whole operation is a disguised monopoly. I travel to Omaha periodically for work, and while there are any number of cabs with different phone numbers and paint jobs, they’re almost always owned by the same parent company.

The taxi companies have worked hard to maintain this cartel. In New York, the system is dependent on individual medallions. The supply has been so restricted, and driving a cab so lucrative, that the value of the medallion grew substantially over time, to the point where people had to borrow heavily to afford one. They were willing to take on the financial burden of doing so because the expectation was that one could make it back once they retired and sold the medallion.

In Denver, you don’t have to buy a medallion, you just have to qualify to work for the company in question. But the Public Utilities Commission limits the number of companies and the number of drivers. Back in 2013, after an extended legal battle, Mile High Cabs won the right to put 150 new taxicabs on the street.

While the Public Utilities Commission (PUC) had determined Mile High Cab was financially fit and that its drivers were well qualified, the commissioners decided that Denver did not need a new taxi service. According to the ruling, however, the PUC must show how additional cabs would be “detrimental to the public interest” before rejecting an application.

A year later, the PUC pulled a maneuver designed to handicap UberX and Lyft. It lobbied for legislation requiring rideshare companies to have its drivers carry $1.5 million in insurance. That number was dropped to $1 million in the final bill, but one day later, the PUC dropped the insurance requirement for taxis to $500,000.

Given that the government has helped to create this problem, what can it do to unwind it, while not costing the citizenry the convenience, reliability, and lower rates that ridesharing provides?

First, where Uber and Lyft have entered the market, it can refund a portion of the original medallion price or company franchise fee, for recent entrants only. They bought into a system with certain competitive expectations, and the government willingly took their money, and then allowed competitors to flood the market. It makes no sense to give back all the wealth and productivity gains that ridesharing represents, but it also makes no sense to force recent entrants to bear their cost, either.

Second, governments can deregulate the taxi business, at least in terms of the number of cabs on the street and the rates they charge. In some sense, UberX and Lyft have done this for them, anyway. There’s no good reason why it should take more than some paint, a safe car, insurance, and a clean driving and criminal record to get a hack license and start a cab company. And if there’s anything the government is horrible at doing, it’s setting prices.

If they had taken some of these steps years ago, the market would have had time to adjust. Maybe ride-sharing companies would still have come along, but they would have had to compete with a more robust taxi industry, one groomed by competition to be more reliable and lower-priced. The disruption could have taken place over a period of years, rather than all at once, revolution style.

The effect of ride sharing on taxis is perfect example of how technology, innovation, and markets can have destructive real-world social implications. We benefit from those innovations, but we shrug off their implications for real people at our peril.

Fortunately, there are some things we can do to help make things right for both drivers and riders.

About the Author:

Joshua Sharf has headed the Independence Institute’s PERA Project for three years. In that time he has authored a number of Backgrounders and Issue papers on Colorado’s Public Pensions, contributed to the Institute’s weekly newspaper column, and spoken to political and civic groups across the state on the subject. He routinely testifies before the state legislature on proposed pension reform bills. He has also done original reporting on PERA for Watchdog.org and I2I’s Complete Colorado news site and is a regular guest on local talk radio, discussing this and other state and national political issues. He has an MBA and an MS in Finance from the University of Denver’s Daniels School of Business, and has also worked as a sell-side equities research analyst.