When Competition Causes an Industry to Collapse

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 Joshua Sharf

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 is Vice Chairman of the Denver Republican Party and 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.

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14 responses to “When Competition Causes an Industry to Collapse

  • I am not an Uber fan. I want proof of insurance to carry passengers for profit.

  • Uber is CHEAPER????????

    If a taxi driver attempted to charge “dynamic pricing” rates to a customer, he or she would a) lose their license and b) end up facing charges. Uber does this all the time. dynamic pricing may be a multiple of ten times the standard rate.

    Yep, that sure sounds CHEAPER to me!!!!

    • Of course it’s cheaper. You have the option of traveling in off-peak times for a fare that’s typically much less than a cab fare OR of being confident that a ride will be available when you want one at the worst peak time.

      Every demand based system faces the ‘peak load/average load’ problem. The only way to deal with it effectively is differential pricing.

  • That’s how the free market works! First, you undercut prices, and destroy their customer base! Then, you jack up fares, once you are the only game in town!! Throw ten of thousand small businessmen out of work, so that an unresponsive corporation can make huge stock gains for their investors!!

    • The only free market is the black market where the consumer has not recourse to the law. The essence of all ‘free’ markets is a pimp stealing a john’s wallet while holding him up a gunpoint.

    • But that’s precisely what is now happening to the cab companies. They established a monopoly, jacked up prices, and then … they’re SHOCKED when suddenly the monopoly no longer works and others can compete in a free market.

      And if one day Uber and Lyft put all the cab companies out of business and then raise their prices what do you think will happen? Could a NEW company come along and offer lower prices like those that U and L used to charge?

      Why not?

    • Actually the UBER and Lyft models are far more competitive than the crony taxi business. Many more vehicles and drivers driven who swarm into the market when spikes in demand produce shortages in service. Much more coverage of outlier districts. And the ability to choose the size and quality of the vehicle yhou use.
      You seem to resent the fact that corporations who did a great job overcoming crony capitalist taxi monopolies allied with politicians are making money. I think that people who innovate and provide better service at a lower cost should generate great wealth for doing so. That keeps encouraging new entrants to invent yet better services.

      • Uber and Kyft own ZERO polling stock, ad depend upon contract workers to drive their personal vehicles into the ground for sh;t compensation!! They receive NO healthcare or retirement bene3fits, so society must pick up those costs of face decline! Its a win/lose proposition for the workers!! All the money goes into the pockets of the ruling class that AG just demonized in an article!

      • I am sure you think the drivers should get $100/hour. Open a business paying that much and see how it works for you. Uber and Lyft pay what is necessary to get drivers. There is no shortage. Drivers make money they would not have gotten. Nobody made you economic dictator. People offer wages and other people choose whether it is worth their while or not. I have talked to many Uber drivers. None are looking at this as their lifetime career. None are looking for retirement benefits or healthcare coverage. The vast majority I have spoken to are basically students getting some extra cash, homemakers pulling in some extra cash to cover car payments or other expenses, some are on welfare but picking up extra cash, people who want a job where they can work when they want to or not work where they do not – where freedom to run your life on your own terms is paramount and an 8-5 job is not their goal. Nobody puts a gun to their head to make them work for Uber. All the ones I have talked to like the job, like the freedom. Did not discuss insurance with most of them but the ones I talked to had their insurance through school or spouse or were on disability.

        In the real world, not all jobs are careers. Not all jobs will allow a single worker to earn $75K a year. Some jobs are less lucrative but make up for it in convenience, flexibility, or are entry level job. The idea that low value creation jobs like flipping burgers at a McDonalds or driving an Uber is supposed to make you middle class is absurd. If you want a job that puts you in the middle class then learn a skill or start a business. College is an option for the 25% of the population (a generous estimate) with the intellect to actually do real college level work on actual substantive degrees. But there are lots of other jobs – welders, plumbers, HVAC, drywall, construction, manufacturing and many others – where someone who does not have the intellect or interpersonal skills for a white collar high value creation job can still make a middle class income, jobs where there is actually a shortage of skilled labor. People make their own choices. But not everyone wants that, not ever. And many people are in a position in their lives where they just want to hustle up some extra money. And that is where employers like Uber and Lyft come in.

        I know it hurts you in your heart or your butt to think that entrepreneurs who come up with a useful service can actually grow rich off of taking the risk and doing the work to make their ideas real. I understand that you know that you do not have the smarts or drive or moxie to do it and resent their success. Grow up. Entrepreneurs have made our prosperity possible.

  • Taxi companies were way to slow to react. One of the benefits of Uber and other services is the app and scheduling and monitoring you can do of your ride and ride arrival, basically just using gps, a few good algorithms and modern IT to make the ride predictable in timing and cost. Imagine if the big new york or boston cab companies did this? They could compete on brand and safety and reliability. Instead they want you to call an angry dispatcher , or try to flag down a ride in the rain…. They are still in the phonebooth era and wondering what happened to them.

  • It is corrupt and unfair for the gov’t to force one group of people to bear the cost of licensing (medaillons and being regulated) and then turn around and similtaneously let another group provide the same service without such licensing. Yes taxi companies were stuck in an obsolete model and provided limited service and Uber may have a better model BUT taxi service was a regulated commodity limited by gov’t regulation. If gov’t now allows unregulated competition, great and good, but it owes purchasers of medaillions some sort of compensation for lost value of their investment.

  • Good GRIEF! All this talk (below) that the cab companies (and drivers) are owed some sort of compensation because their business model went belly up.

    What compensation did we owe telegraph companies when the telephone replaced them? Companies that refined and distributed kerosene when the electric light eliminate oil lamps? Makers of horseshoes and buggy whips when the automobile came along?

    Is anyone proposing welfare for Sears/K-Mart whose business model was flattened by Wal-Mart?

    Either the cab companies will adapt to compete with Uber and Lyft or they’ll go away. That’s life and perhaps more importantly it’s why the American standard of living rises continually.

  • We NYers have 2 words for medallion monopolies and their crap cabs


  • City governments working with crony companies restricted the number of cabs, reduced competition, controlled pricing – basically removing any financial competition, any financial penalty for poor service – and got poor availability in most locations, higher than needed prices and still dirty, mediocre cabs. This is what happens when governments suppress the competitive market.

    Ride-sharing restores the competitive marketplace. Availability of rides and reliability of rides is much more widespread. You can pick the level of vehicle quality and size you want to select. Drivers are more part-timers, less experienced but find for the job in every ride I have used. Capitalism once again in operation and producing superior service at better prices – as it always does compared to government crony enterprises.

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