Wednesday, February 25, 2009

Mr Rick goes to Washington

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 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.

Sunday, February 15, 2009


Thursday, February 12, 2009

Ignoring reality in the realty market

The property market in Ireland has ground to a standstill and seems likely to stay this way for some time. Today’s Irish Times has an article on how to help kick-start the market. It is from Conor Gallagher of estate agents Douglas Newman Good. Bluntly, it is not a very good piece. Judging by the title you’d think there was only one market that matters in the economy. Lets look at what’s been done so far to “kick-start” the market without government intervention.

Over the last 18 months or so those on the supply side of the market have been getting ever more desperate to try and get some sign of life from the demand side of the market.

For a long time there was an unwillingness to reduce prices so sellers looked to put extras in to encourage buyers. It started off with some small efforts to spark a bit of interest. Initially the sweeteners ranged from free foreign holidays to fitted kitchens. This continued and some developers offered the allure of a free car to try and attract buyers.

To this observer this seemed to simply be a reluctance to reduce the asking price. In fact during this period house price indices showed little change in house prices when in fact the real price was falling substantially.

The sweeteners didn’t have the desired effect so eventually sellers began to realise that falling prices were a reality that they couldn’t ignore. But again they tried to ignore reality.

The next “innovation” was “rent to buy” schemes. Here a buyer agreed to buy a house at the current price but only paid for it three years later - at which point the buyer could withdraw from the contract. The buyer paid rent for the three years which would be subtracted from the purchase price (plus interest!) if they bought the house. As before this had little effect as buyers clearly felt that prices would fall by more than any amount they would pay in “rent”.

Next the sellers turned to buyers’ gambling instinct and we had the “buy one and you can win one” schemes. In a scheme of 30 houses the developer would (try to) sell 29 of them and then raffle the last house among the buyers so that one lucky buyer would get too for the price of one. The tune is the same with this. In reality that was akin to a price reduction of a little more than 3% for the developer but of course the nominal “asking price” wasn’t reduced.

Again buyers were not turned on by this. Most people only want one house not two and would prefer a price reduction on their own rather than enter a lottery. Plus, the house would only be raffled when all 29 were sold. It might be a long wait! Inspired by this one man took the idea of a house raffle to extreme, see here.

The most recent attempt has been the introduction of Secure Step Mortgages. This time the developer pays a 15% “bond” to the mortgage provider. After five years the property is independently valued and if it has decreased in value the purchaser will be paid the money from the bond up to the value of 15%. If the price is the same or has risen the bond will be returned to the developer. This is supposed to provide “security” to buyers against falling prices. It was only launched yesterday but I can already guess what the buyer reaction will be.

Those on the supply side of the market are arguing that they have tried their best to “kick-start” the market and that now it is time for the government to intervene. Well, I have one piece of advice for Conor Gallagher, Douglas Newman Good and their ilk that is guaranteed to generate activity in the market - reduce prices. No sweeteners, no raffles, no gimmicks, just prices!

Anecdotal evidence suggests that mortgage brokers have “lots” of customers on their books who have mortgage approval but are waiting either for prices to fall further or the market to turn. As with all markets there is no shortage of buyers in the market and current low interest rates are likely to serve as a further stimulus.

However, buyers are well aware that current asking prices are still unrealistic and all the gimmicks in the world won’t change that. In the long run houses should be valued at 4 to 5 times average annual wages or 12 to 14 times average annual rents. Once prices get back to this level we’ll see a bit of action.

Wednesday, February 4, 2009

The man on the spot

Nobel Laureate Friedrich von Hayek was a strong advocate of tacit knowledge. This is best explained by this short extract from his 1945 article The Use of Knowledge in Society:
Times have changed since Hayek wrote this and most of the centrally planned economies of which he speaks failed. However, in a sense we have swapped one kind of planned coordination for another. In the middle of the 20th century whole countries were organised using central planning. Now we have corporations acting as coordination mechanisms where most of their activity is controlled and planned by central management. Of course, central management are likely to fall foul of the same knowledge problem that central planners faced.
This is, perhaps, also the point where I should briefly mention the fact that the sort of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form. The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the "man on the spot."

Central planning has failed as a way to organise economies but a central structure has not stopped corporations from getting larger and larger. If Wal-mart were a country it would be the in the top 30 economies in the world ranked by GDP, ahead of countries such as Austria, Argentina and Indonesia, and it would rank as China'a 8th largest trading partner. Central planning didn't work out too well for countries but doesn't seem to be doing too bad for companies. In 2006 Wal-mart reported profits of $12billion on sales of $350billion.

How has Wal-mart being so successful and avoided the problems of statistics that "lump together items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision." A recent post by journalist, Charles Platt on the blog provides a great insight.

Platt took a minimum wage job at Wal-mart to see if the commonly held beliefs about the company were true. He found that they were largely untrue and that the reputation was unwarranted. That is not our focus. His piece gives us this gem on tacit knowledge and "the man on the spot".
My standard equipment included a handheld bar-code scanner which revealed the in-store stock and nearest warehouse stock of every item on the shelves, and its profit margin. At the branch where I worked, all the lowest-level employees were allowed this information and were encouraged to make individual decisions about inventory. One of the secrets to Wal-Mart’s success is that it delegates many judgment calls to the sales-floor level, where employees know first-hand what sells, what doesn’t, and (most important) what customers are asking for.
That sums it up perfectly.