Privileges, Rents and Vested Interests: the Taxi Cartel threatens violence to protect its rents

The biggest news story in the world of transport over the past year has been the rise and rise of Uber. Uber is a technology company which has created a smartphone application which allows people who need to get somewhere, and other people who are happy to drive them there, in their own car, for a price, bypassing the taxi network.

From what I’ve heard (I’ve never used the service), Uber is popular with customers and drivers because it is cheaper than a taxi, and the service is better than in a taxi. Its growing popularity is testament to Uber’s filling a need in the market which the taxi network both created and neglected to fill, and which it still refuses to fill, even as it fulminates against the upstart company.

Why did the taxi operators and taxi licence owners create this gap in the market, and why do they neglect to fill it? And why are they so angry with Uber? The answers derive from a privilege created for them by government fiat, the rents arising from the granting of that privilege, and the vested interests which the rents have created. 

In many jurisdictions around the world, including in Australia’s states and territories, one is required to have a taxi licence and taxi plates, or a hire-car licence and hire-car plates. There’s no actual need for a person to be licensed in order to hire out their car for use as a passenger service: I know from personal experience that it is quite common in Kazakhstan and Uzbekistan for people to offer seats in their cars to passers-by, for a negotiated fee. The reason why some jurisdictions insist on having passenger-hire services licenced is because:

  • it creates the appearance of some degree of regulation of the industry – although anyone who has driven in a taxi knows that there is v. little quality control by the government, either of the cars or of the drivers;
  • the sale of taxi licences creates an income stream for the government.

However, for some reason – possibly to increase the sale price of the licences, and possibly as a result of lobbying from existing owners of licences – for many years now governments across all jurisdictions have restricted their sales of licences. As a result, the number of licences per capita – that is, per head of population – in these jurisdictions has fallen considerably, and the value of those licences to their owners has risen significantly.

  • For example, the number of licenced taxis operating on the streets of Paris in September 1914 was 10,000, to service a population of around 4.5 millions. 100 years later, and despite the population more than doubling to 10.5 million and becoming much more wealthy, the number of taxis has increased only to 18,000.

The privilege of owning a licence, created by government regulation and restriction of licences, creates a stream of economic rents for the owners of those licences. Economic rent is a term used in economics to describe an income for which the recipient undertook no labour. It is different from profit from undertaking an enterprise and exposing oneself to risk of failure. The owner of the rent-earning resource – in this case, taxi licences – earns an income simply by virtue of the fact that the government has created an artificial restriction on the number of taxi licences.

Because of this fact, the owners of taxi licences form a vested interest, that is, a group with an interest in perpetuating a state of affairs which is favourable to them. In the case of taxi licences, the licence-holders have an interest in the ongoing restriction of issuance of taxi licences by the government, and the ongoing restriction of the provision of passenger-hire services to those who hold licences. And they argue long and loud in favour of these restrictions, because any relaxation in these restrictions will cause a weakening in the growth of their rents, or even possibly a contraction in their rents, and a fall in the value of their licences.

But while this situation of restricted services is ideal for the owners of taxi licences, it is less than ideal for customers.

  • The availability of taxis is restricted, especially at peak times and ‘shift change’ times (3pm and 3am).
  • The cost of taxi services is higher than to would be in a market with unrestricted issuance of licences.
  • The quality of services is poor because owners and operators of taxis are less responsive to customer needs than they would be in a market of unrestricted competition.

This neglect to serve the market, in favour of maintaining privileges and rents, means that there is a gap in the market. Anyone who can fill this gap with a relatively cheap and higher-quality offering is in a great position to make a lot of money quickly, and drive the taxi network out of business.

Enter Uber.

  • Not having to cover the cost of taxi licences, its drivers can offer cheaper services than taxis, directly negotiated with customers rather than determined elsewhere and applied automatically and with zero discretion by the driver.
  • Direct ratings of driver service by customers, which appear against the driver’s name when other customers are assessing online the driver’s offer of service, create a strong incentive for drivers to offer passengers a high quality of service – poor service is punished, good service is rewarded.
  • The theoretically unlimited number of Uber drivers, and the strong incentive to create a good experience for the customer, means that service is often quick and reliable: no more waiting hours on a Saturday night for a taxi that never shows up.
  • If a passenger isn’t happy with the fare that they were charged, she can ask, via the Uber app, for a fare adjustment. If Uber considers that the passenger has a valid complaint, the company will reimburse the passenger for the unwarranted part of the fare.

Uber is what is known in the strategy-consulting world as a killer app: an innovation which threatens to disrupt and eliminate an entire business model. In this case, the business model is that of the taxi industry. And the taxi industry is angry about it. It threatens the continuation of their rent-extraction like nothing else. And it is driving them insane.

Here in Sydney, the spokespeople for the taxi industry have made noises about how Uber is operating illegally (which is true) and potentially unsafe for passengers (which is also true). But these arguments are cutting no ice with the community:

  • the taxi industry’s long and systematic abuse of its monopoly privileges, which have resulted in an expensive, poor-quality service, have alienated their customer base. People don’t care that Uber is operating illegally, because the legally-operating taxi network is nothing short of a vomit-inducing scam;
  • while Uber may be unsafe, the shabby cabs and shonky drivers of the taxi network mean that it too is also unsafe, and possibly more so than the Uber network, where drivers have a stronger incentive than the owners of taxi licences to provide a safe service.

So the taxi industry is on a hiding to nothing. All they have to protect their monopoly privileges is their current strong hold over pusillanimous, feckless and none-too-bright governments. And as the public becomes more comfortable with using Uber, more disdainful of the taxi industry, and more supportive of regulatory change to remove the taxi industry monopoly, that hold will weaken.

So, it is no surprise that taxi licence owners, and the lowly-remunerated drivers who are caught between the licence-holders and their new competition, are becoming increasingly shrill in their condemnation of Uber, and more bloodthirsty in their threats against those who threaten to ‘move their cheese’. Thus, we see stories such as this:

Thymios Lymberopoulos, the outspoken president of Attica’s taxi federation, on Thursday declared that any cab drivers found to be working with international ridesharing service Uber, which recently extended its operations to Greece, should be “hanged.”

“Any cabbies who betray the taxi, like modern-day Judases, for 30 pieces of silver, should be hanged,” Lymberopoulos wrote in comments on his Facebook profile page. “The war has just begun,” he wrote, adding that all taxi owners should keep their eye on drivers renting their vehicles.

“The driver may be passing through the profession and might not care about tomorrow,” the federation chief said and warned against “allowing every opportunist to play with and undermine our wealth and our profession.”

Yes, that’s right. If you can’t beat them, hang them.

One lesson I would like you to draw from this story is:

  • nothing squeals louder, and longer, than a vested interest seeking to defend its privileges and rent-extraction – nothing.

Prepare for howls louder than those of banshees, as competition from Uber and other tech companies intensifies, and the taxi industry sees the writing on the wall.

UPDATE: The ABC current affairs show 7:30 has produced a report on Uber. You can watch it here – look out for Harry Katsiabanis at the 2:45 minute mark: ‘If you can’t beat ’em, crush ’em!’


About Stebbing Heuer

A person interested in exploring human perception, reasoning, judgement and deciding, and in promoting clear, effective thinking and the making of good decisions.
This entry was posted in Privileges Rents and Vested Interests and tagged , , . Bookmark the permalink.

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