Part D – Understanding and improving industry performance (PDF ...

A theme running through submissions to the inquiry, and
through previous work on taxi issues by relevant bodies
such as the Essential Services Commission (ESC), is the
pernicious effect of quantitative limits on taxi licences and
the associated licence values (reflecting their scarcity)
that such limits create. Hire car controls are less onerous
and therefore create fewer problems, but still have
undesirable effects.
The Department of Transport (DOT) submits that the
quantitative controls on taxi licences were ‘central’ to the
taxi regulatory regime in Victoria and further notes:
These restrictions were introduced in the 1930s
during the Great Depression. However, the shape of
the industry, and the nature of the challenges it faces,
have changed dramatically since the 1930s. 9
In general, limits on the number of new entrants into
an industry are undesirable. However, there are some
circumstances in which new entry is not, on balance,
beneficial for the community. The conditions under which
limited entry is beneficial are very unusual (see case study).
In line with its focus on exploring reform from a service
perspective, the inquiry’s analysis has concentrated on
whether quantitative restrictions on taxi licences have had
a detrimental effect on industry performance.
Understanding the costs and benefits
of entry restrictions
Free entry of firms benefits the community if the gains
from entry of new firms exceed their costs. Gains
generally come from the increased competition that
new entry generates: lower prices, better quality,
increased incentives to produce more efficiently and
allowing for the introduction of new and different
services. The costs of entry primarily come from
the duplication of fixed costs: this can mean higher
average costs for the industry as a whole.
The possibility that there might be ‘too much’ entry
from the community’s point of view is that, while
the competition due to new entrants may have
some desirable effects, these entrants also ‘steal
business’ from existing firms, which could result
in a fall in industry productivity. The net gain from
entry depends on whether the competition benefits
outweigh the productivity losses. Where competition
cannot generate these net gains for some reason,
this is termed a market failure.
Applying this analysis to taxi services, there are both
costs and benefits to new entry:
• The costs are the duplication of fixed costs
(vehicles, insurance, network service provider
fees and so on), which mean that occupancy
rates of vehicles are lower than they could
be even when all demand was served.
• The benefits of entry result from new demand
generated by lower waiting times, competition
driving fares lower or increasing incentives to be
efficient and to offer innovative services.
Restrictions on entry can only be justified if the
evidence suggests that the gains outweigh the
costs. In particular, a finding that the benefits of
restricting entry outweigh the costs would require an
assessment that:
• More entry would not increase the number of
expected trips or passenger kilometres (which
would, in turn, require that entry would not
lower waiting times or that consumers were not
sensitive to lower waiting times)
• There would be little fare competition resulting
from entry
• The efficiency of fleet operation would fall
• There would be few new and innovative services
introduced by entrants.
9 DOT, Op. Cit, p.1
As well as these conditions being met at any point
in time, these conditions would also need to hold
over time.
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