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

1. Is too much entry likely, and does Victoria already
have too many taxis?
The first argument in favour of quantitative restrictions
is that there will simply be ‘too much entry’. The inquiry
received numerous submissions and comments from
licence owners, taxi operators and drivers that there is
no need for more taxi licences in Melbourne or elsewhere
in Victoria. It would be easy to dismiss this as ‘industry
pleading’, but there is evidence to suggest this is more
than a theoretical possibility in taxi markets.
One reason why too much entry might occur comes from
price regulation. For example, prior to the removal of
entry controls, fares may be regulated taking into account
the rental (or assignment) value of a taxi licence. This
may occur explicitly or implicitly. Then if entry controls
are removed, but there is no consequent downward
adjustment in fares either through competition or fare
regulation, there will be too many new entrants into the
industry and they will all operate inefficiently. As noted by
Dr Darryl Biggar in a paper prepared for the inquiry:
…in those markets in which price competition is
absent (such as the market for rank-and-hail taxi
services), and where entry is uncontrolled, if regulated
fares are set above an efficient level then it is likely
that there will be ‘too much’ entry. In this sense,
setting regulated tariffs too high might result in a form
of ‘over supply’. However, this is not a market failure
in its own right – rather it is a symptom of the failure
to adequately or effectively correct another market
failure (in the price mechanism). 42
There is some evidence that this is consistent with the
experiences of Ireland and the Netherlands during the
2000s. 43 In these markets, entry controls were removed
but fares did not fall to compensate for the lower cost
structure of operators. In Ireland, where existing fare
controls were maintained, supply increased greatly as
did demand. In the Netherlands, where the maximum
fare was increased, supply increased as did the level of
fares and the overall effect on demand was mixed. 44 In
both cases, new entrants were presumably attracted by
the high fares and overall vehicle productivity suffered by
more than would have been the case if fares were also
lowered. However, the inquiry notes that it is not obvious
that consumers were worse off as a result: this ultimately
depends on the effect of the additional supply on
consumer demand. If many more trips were undertaken
at the higher price, then the gains from the (inefficient)
entry may well have outweighed the costs.
To better understand the effect of entry restrictions and
whether more supply is likely to stimulate demand, the
inquiry has undertaken some specific surveying to gauge
the importance of service availability to consumers. This
is discussed further in chapter 19.
The inquiry also examined evidence on the number of taxis
and hire cars in Melbourne and Victoria compared with
other jurisdictions. This gives some insight into whether
different licensing regimes have a significant impact on the
quantities of taxi and hire car services consumed.
Simple comparisons can be made across jurisdictions
about the number of taxis and hire cars. However, this
does not tell the complete story. The number of vehicles
required to service the demand for taxis and hire cars
depends on many different factors. Some measures
that are sometimes put forward as being relevant are
described in Table 10.1.
Table 10.1 Factors affecting the ability of taxis and hire cars
to service demand
Factor
The greater the population of
the area served
The higher the population
density of the area served
The better the quality of
public transport options
The higher the numbers of
tourists (airport journeys)
The more intensively vehicles
are used (such as double
and triple shifting)
The higher the levels of
private vehicle ownership
The higher the average
income
Supports fewer or
more taxis?
More
More
More (taxis are complements)
Fewer (taxis are substitutes)
More
Fewer
Fewer
More
A careful distinction also needs to be made between
what drives demand for taxi services and what is relevant
for determining how many taxis might be required to
fulfil actual demand. A higher population within an area
would seem to support more taxi services, as this should
be closely linked to demand. On the other hand, vehicle
utilisation has nothing to do with demand but more
intensive use of vehicles (such as double or triple shifting
of a vehicle) would reduce the need for more vehicles to
meet demand.
42 Biggar, Darryl (2011), Why and how should we regulate taxis? – Paper
Prepared for the Victorian Taxi Industry Inquiry, Melbourne, p.16
43 See for example Baanders, A. and Canoy, M. (2010), Op. Cit., p.3
44 The number of trips was reported to have fallen while the number of
passenger kilometers rose, implying higher average trip lengths
192