Tuesday, February 17, 2009

Taxis, taxis everywhere but should we stop to think

Following a steady rise in the number of taxis operating in Ireland during the 1970s taxi license holders successfully lobbied in 1978 to restrict entry into the market by limiting the number of licenses. They argued that because there were significantly more taxis than the demand justified, incomes were being depressed. 31 years later and 9 years after the market was deregulated it looked like we were about to see history repeat itself.

In 22 years following the 1978 decision regulation decision, the fixed number of licenses became increasingly more valuable, driving up the average price of a license to IR£100,000 (c. €150,000 in real terms) by 2000. In November of that year entry into the taxi industry was deregulated and freedom of entry was restored. This had the expected effects on the market which included an increase in they number of taxis (they had tripled within two years), a collapse in the price of a taxi license and a significant derease in waiting times for consumers. Existing license holders were compensated for the loss in value to their licenses and overall the deregulation had been generally seen as being successful.

If we look at the market now the cost of a new license issued by a local authority is €6,300. There are reports that they can be bought "second-hand" for around €4,000. (A quick search of buy and sell.ie suggests that the average asking price is around €5,500 and there are lots of "wanted" notices offering €5,000 for a taxi license.) It is not often that a grey market sells an item at a markdown from face value.

There have been complaints from a strange coalition of sources looked to have the regulation issue addressed once more. These include Sinn Fein in an article in An Phoblacht, Katy Sinnott in a question to the EU parliament.

This Canadian argues that the increase in supply following deregulated in a market without price controls leads to an increase in price. However in Ireland we appear to be seeing a price decrease! This is in spite of the fact that the market is still price regulated. One company in Dublin is now offering a discount of 20% off the meter price to all customers. (No direct link but see discussion here, here and here)

On the 9th March The Taxi Regulator published a report from Goodbody Economic Consultants on the taxi market. Two of the findings were:
  • The supply structure of the cab industry is undergoing significant change. This involves increased part-time working and an increased proportion of drivers with a second job.
  • Cab drivers have to work longer hours to achieve their income targets and on an hourly basis, they are earning well below the current average industrial wage.
Yet, the main conclusion was that a limit should not be reintroduced on the number of taxi licenses in operation. This is despite the fact that licenses are selling at a discount to face value, discounts are being offered on the regulated meter price and reduced incomes for drivers inspite of longer working hours.

The taxi industry is a service industry and in theory should have freedom of entry and exit. However, unlike most service industries it is not one where a supplier needs to develop, build and maintain customer relationships. When somebody wants to use a taxi they will take the first car available. There are no real benefits from being a "good" taxi driver. Even though 2/3 of taxis trips are arranged by phone customers will generally take the first car available with that company and will not ask for a specific driver.

In other service industries customers are more willing to incur search and evaluation costs. People will generally not choose the first hairdresser, painter, plumber they come across or any of a host of other services you can think of. They will ask friends and relatives of their experience. They will look for recommendations. They will return to a provider who provided an excellent service.

There are advantages to being "good" in these industries and suppliers can build up customer relationships. If these are strong enough, new entrants to the market do not pose an immediate or significant threat. Although there are no explicit barriers to entry in these service industries a new entrant does not have immediate access to all customers.

In the taxi industry a driver can buy a plate, and a few minutes later be at the top of the neareat rank ready to pick up the next customer. It doesn't matter if he is full-time or part-time, has a second job or not, or has been a driver for 20 years or 20 minutes. The next customer will sit in and he's earning a fare.

It is hard to make concrete proposals and I do not think that a limit on the number of licenses should be introduced (that's just a case of picking a number). At the very least I do think that licenses should not be transferable. What is the point of a licensing and vetting system if anyone can ring a number from Buy and Sell and make an offer for a license?

The market is working for consumers and that is undoubtably a key outcome goal but perhaps it is time we gave a little more thought to supplier conditions.

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