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

Restrictions on entry provide an obvious justification
for fare regulation. The scarcity of taxi licences means
licence holders have market power, which cannot be
eroded by competition. However, there may be a need
for fare regulation even when there is no scarcity of taxi
licences. This was raised at the inquiry’s Independent
Roundtable by economist Dr Darryl Biggar who argued
that the problems are not simply related to entry controls:
…there seems to be a consensus that while there is
scope for conventional market processes in certain
taxi sub-markets – particularly the pre-booked market
– in certain other taxi sub-markets there is limited or
no scope for normal market processes. At least in
those sub-markets, therefore, there seems to be an
identifiable form of market failure. 103
Market failures may occur due to the imperfect
information and barriers to exercising consumer choice
that are common in taxi markets. In these circumstances,
competition from greater vehicle availability does not act
to hold fares to reasonable levels. It has also been widely
noted that these arguments primarily apply to ‘rank
and hail’ taxis rather than pre-booked vehicles. This is
perhaps another reason why hire cars have generally not
been subject to explicit fare regulation.
For example, the OECD notes that:
Consumers who hail taxis on the street are uncertain
about waiting time until the next taxi and, in a market in
which fares have been deregulated, about the relative
price of the currently available taxi and any taxis that
may be able to be hailed in near future. Because
waiting time is a significant element of service quality
for taxis, they therefore face uncertainties as to both
price and quality. Moreover, consumers are unable to
keep the offer ‘in hand’ pending the arrival of a second
cab. In these circumstances, monopolistic pricing is
possible even in the presence of substantial numbers
of producers. 104
Others have also pointed out that particular passenger
types may be more vulnerable to price gouging. Some
customers, such as tourists, are less likely to provide
repeat custom, so there is less incentive to provide
exceptional service, or they lack of local knowledge
and so may be taken advantage of. Customers in
other circumstances, such as those with considerable
baggage, the poorly informed and perhaps even
customers who have concerns over safety and wish to
be taken away from a particular locale, are all vulnerable
to paying more than the market rate.
The UK Office of Fair trading found that:
The nature of the rank and hail sector of the taxi
market makes it almost impossible for consumers to
exercise choice on price as it is very difficult to shop
around. Deregulating fares may therefore lead to
higher prices. This is particularly important, for
example for disabled consumers (who may not have
access to alternative forms of transport), for those
concerned about their safety (for example if they are
catching a taxi late at night), or for those who do not
know the local area. In these and other instances,
fare regulation protects consumers from being
overcharged. 105
Notwithstanding these arguments, the inquiry also
notes that in an environment of restricted licence supply,
owners of licences can extract profits from those actually
providing the service. Regulation of fares offers one
way in which these profits can effectively be controlled.
However, this potential control has arguably been lost
as the profits earned by licence owners are incorporated
into fares as a legitimate cost for operators.
10.5.4. Complexities in setting fares
While fare control offers the community certain benefits,
it may also impose some substantial costs. Some of
these costs relate to the specific type of regulation that
has been pursued in Victoria. Some costs appear likely
to be prevalent regardless of the particular method of fare
control. The primary costs identified by the inquiry include:
• It reduces competition between taxi operators.
• It stifles innovation by service providers that could
potentially offer different kinds of services (whether
lower or higher quality) with a different fare structure
(such as fixed fares).
• The degree of averaging in the fare structure,
both across time and across geography, creates
distortions in how drivers treat fares of different types
(for example, favouring longer trips over shorter
trips) and potentially inefficient vehicle utilisation (for
example, large queues at the airport).
• It legitimises the economic rents earned by licence
holders, which are included in fare setting models as
real costs to operators.
• Fare regulation can also lead to ‘too much’ entry if
fares are regulated at a level that allows inefficient
firms (taxis with low utilisation) to prosper.
103 Biggar, Darryl (2011), Op. Cit., p.12
104 OECD (2007), Op. Cit., Background Note, p.19
105 UK Office of Fair Trading (2003), The regulation of licensed taxi and
PHV services in the UK, OFT 676, p.60
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