EC 461 Regulation of Taxi Licenses and Entry of Uber

Michelle Reis
August 11, 2014
EC416, Industrial Organization & Public Policy
Joseph Wyer
Regulation of Taxi Licenses and the entry of Uber
The taxi industry began following the invention of cars in the mid-1800s. The industry
was largely unregulated up until the 1930s when the Great Depression hit proceeding World War
II. With limited jobs in the economy, the taxi industry saw a large climb in the entry of
unemployed people trying to earn cab fare (Wyer). The taxi companies that were already
established, responded to the increased entry by pressuring for more regulation in the industry, a
response exemplified in the Becker model fashion. Successively occurring in the 1930s, taxis
became government supported monopolies that were only able to operate and exist in turn for
following the regulations set by local governments. The regulations ensured the protection of the
taxi industries interests to earn fair wages and the consumers’ interests for quality of service,
fairness in pricing, and public safety. The taxi industry has successively held their monopolistic
power for abiding by these regulations that still continue to impact the industry today. However
in the last decade, Uber, a tech startup that offers car services, entered the highly regulated taxi
industry. Entering as an unregulated firm, Uber is directly competing with the taxi monopoly’s
extensive regulations that consist of entry restrictions of price controls, number of taxis in
operation, and practices, for a profit (Wyer).
The taxi industry requires local governments to practice regulation by setting mandatory
prices for taxis to charge their consumers. Regulations of price control profits in the taxi industry

2
ensure cab drivers can earn a minimum profit. For instance the rates in Boston, Massachusetts
are, “$2.60 for the first 1/7 of a mile and then 40 cents for each additional 1/7 mile”
(Mohammad). Boston taxi rates, comparable to all taxi market rates in the industry were set with
no consideration of being effected by competition. Explained and displayed through x-
inefficiency, the taxi monopolies did not have pressuring competition that would force them to
cost-minimize, so instead they set the price above their long-run average costs to make positive
profits (Wyer). With the prices fixed above average cost, Uber came into the industry and had
the incentive to set their prices below the long-run average cost at the minimum efficient scale,
where it was equal to their demand and they could make a profit. Uber mainly charges its
consumers on a mile basis rather than time, and payments are directly billed to their credit cards
and a no need to tip policy (Brustein). With Uber setting their prices lower, they can advertise
discounts and the taxi industry is unable to respond immediately. Even if the taxis were able to
respond, they would experience a regulatory lag, in which it would take a significant amount of
time for regulators to change price. This would ultimately not be beneficial for the taxi industry
because Uber also practices surge pricing, meaning that even if the monopolistic regulation did
change, they still could not compete. As Downes states, surge pricing by Uber is practiced
through “raising prices when demand is high and lowering prices when demand is low”
(Downes), to reach an economic equilibrium. Uber’s lower prices compared to the taxi industry’s
regulated prices, Uber becomes more attractive to consumers and therefore gains more demand
and profit. Unable to respond to Uber’s pricing, the taxi industry, tied to its fixed price rates, is
losing customers and ultimately profit because there is a cheaper alternative for consumers.
The taxi industry requires ownership of medallions as a form of regulation to control the
supply and entry of taxis in operation. Medallions, placed on the vehicle hood for clear visibility,

3
signify that the vehicle is a licensed taxicab and it also gives the driver the right to operate the
vehicle (Badger). There are limits to the supply of medallions in these taxi markets because with
a high demand exceeding the supply of taxi services, medallions become an even more valuable
asset (Badger). For example, the number of medallions in New York City has fallen from the
issuance of 13,566 in 1937 to 12,187 issued in 2003, despite the population growing from seven
million to eight million during that time period (Wyer). With the restricted supply of medallions
in the taxi industry, the entrance of Uber into the highly regulated industry threatens the
medallions’ individuality it holds in the industry. Uber’s service opens the market to a multitude
of drivers, reducing the value the medallion holds with its monopolistic service. The value of the
medallion, “determined through the total future discounted profits created by the entry and price
regulation” (Wyer), is diminishing as Uber directly influences that value through their
unregulated influences in pricing and entry. The greatest threat to the taxi industry with the
diminishing value of the medallion, is the loss of drivers that it will incur. Uber drivers can earn
fees comparable to cab drivers without having to own a cab or a medallion, which can lead to the
entire loss of drivers and therefore profits for taxis in the taxi industry (Badger). Uber’s presence
in the industry has shown a great drop in the price and value of medallions exemplifying the rate
at which drivers are entering the industry. The taxi industry finds this practice unreasonable
because their individual worth is being diminished, which is necessary to successfully exist in
the industry.
Safety regulations and insurance for cabs are in place to maintain a standard level of
security in the taxi industry. To be a taxi driver, one must meet all the standards of licensing,
training, and vetting practices (Baker). The vehicles used in operation are inspected and the cab
drivers must have their license renewed annually (Baker). With these strict regiments, the taxi

4
industry provides quality service focusing ultimately on the safety of their consumers. Although
with the entrance of Uber, the industry is being exposed to changing factors because Uber does
not comply with the same safety standards. For example, Uber offers a service that allows the
use of an individual’s car if it is accessible and its quality is in exceptional condition. So, Uber
does not have standardized vehicles as the taxi market does. The drivers of Uber cars are only
required to have a criminal background check and to carry a license and proof of auto insurance
while in operation (Baker). Uber claims they monitor the vehicles that operate in their company
extensively, but Josh Eidelson, found facts that suggest otherwise. As Eidelson states, “The
company says it monitors them, but a recent police sting at San Francisco’s airport caught nine
UberX drivers operating without proof of insurance”. The practice that Uber partakes in proves
to be at an unfair advantage to the taxi industry, because they do not comply with standards in set
by the taxi industry to protect its customers.
Uber has greatly changed the conditions in the taxi industry through their practices in
price controls, number of taxis in operation, and safety regulations. With the entrance of an
unregulated firm in a highly regulated industry, Uber has made cause for great debate and
lawsuits that the taxi industry has imposed upon them. At the center of controversy, the taxi
industry claims that Uber provides a nearly identical service as taxis and should therefore be
required to follow the regulations set in place by the taxi industry and comply with all of the
same requirements. Uber has successfully argued that since the vehicles are not hailed down
from the streets, they are not offering taxi services. The difference is small but rather than hailing
cabs from the street, Uber’s consumers use an online app to get a car, which is seemingly
holding up with government decisions (Mohammad). Taxis do not feel that it is fair to exempt a
business from any of the regulations set in place simply because they provide their services over

5
the internet. However, Uber claims they should not face the same regulations as the taxi industry
because they bring innovation to the industry that the industry would not otherwise be capable
of, which is ultimately in the best interests of consumers. Uber presents itself to be a new market
that is the source of innovation rather than new technology from incumbent firms (Mohammad).
Although facing lawsuits, there are solutions the taxi industry can partake in to ensure the fair
competition they would like to see in the industry.
Most of the existing regulations in the taxi industry remain from a time when there was a
distinct relationship between the service and delivery of taxis. The regulations of taxis no longer
fit the market because technological innovations have entered this field and overlapped the
services provided by the taxi industry. Local governments need to understand that consumers
view the service of Uber as a close substitute to receiving services from taxis. Therefore, the
industry regulations need to change to merely fit the changes in society from technical
innovations that have greatly affected the structure of the industry. Through deregulation, the
taxi industry will be able to compete fairly with Uber and provide consumers with the best
service. In a competitive market generated by fair competition, the most successful service
would naturally win without unfair advantages. Through the practice of deregulation in the taxi
industry, the industry can experience positive technological improvements. With taxis feeling
that they are at an unfair advantage with pricing controls, medallions, and safety regulations, I
believe that deregulation is the best solution for the taxi industry and the effects would benefit
everyone through fair competition.

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Works Cited
Badger, Emily. "Taxi Medallions Have Been the Best Investment in America for
Years. Now Uber May Be Changing That." Washington Post. The Washington Post, 20
June 2014. Web. 06 Aug. 2014.
<http://www.washingtonpost.com/blogs/wonkblog/wp/2014/06/20/taxi-medallions-have-
been-the-best-investment-in-america-for-years-now-uber-may-be-changing-that/>.
Baker, Dean. "Don't Buy the 'sharing Economy' Hype: Airbnb and Uber
Are Facilitating Rip-offs." Theguardian.com. Guardian News and Media, 27 May 2014.
Web. 11 Aug. 2014. <http://www.theguardian.com/commentisfree/2014/may/27/airbnb-
uber-taxes-regulation>.
Brustein, Joshua. "Uber's Fare War on New York Taxis Puts Million-
Dollar Medallions at Risk." Bloomberg Business Week. Bloomberg, 07 July 2014. Web.
11 Aug. 2014. <http://www.businessweek.com/articles/2014-07-07/ubers-fare-war-on-
new-york-taxis-puts-million-dollar-medallions-at-risk>.
Downes, Larry. "Lessons From Uber: Why Innovation And Regulation
Don't Mix." Forbes. Forbes Magazine, 06 Feb. 2013. Web. 11 Aug. 2014.
<http://www.forbes.com/sites/larrydownes/2013/02/06/lessons-from-uber-why-
innovation-and-regulation-dont-mix/>.
Mohammed, Rafi. "Regulation Is Hurting Cabs and Helping Uber."
Harvard Business Review. HBR Global Editions, 9 July 2014. Web. 11 Aug. 2014.
<http://blogs.hbr.org/2014/07/regulation-is-hurting-cabs-and-helping-uber/>.
Wyer, Joseph. "Estimating the Effects of Regulation." Econ 461 Lecture. United States, Eugene.
6 Aug. 2014. Lecture.

EC 461 Regulation of Taxi Licenses and Entry of Uber

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