Federal Trade Commission An Economic Analysis of Taxicab Regulation Mark W. Frankena Paul A. Pautler Bureau of Economics Staff Report May 19B)! FEDERAL TRADE COMMISSION JAMES C. MILLER III, Chairman MICHAEL PERTSCHUK, Commissioner PATRICIA P. BAILEY, Commissioner GEORGE W. DOUGLAS, Commiss ioner TERRY CALVANI, Commissioner BUREAU OF ECONOMICS WENDY L. GRAMM, Director RONALD S. BOND, Deputy Director for Operations and Research DAVID T. SCHEFFMAN, Deputy Director for Competition JOHN L. PETERMAN, Associate Director for Special Projects RICHARD HIGGINS, Deputy Directory for Consumer Protect ion JOHN E. CALFEE, Special Assistant to the Director ROBERT ZWIRB, Special Assistant to the Director JAMES A. HURDLE, Special Assistant to the Director THOMAS WALTON, Special Assistant to the Director KEITH B. ANDERSON, Assistant Director for Regulatory Analysis PAUL RUBIN, Assistant Director for Consumer Protect ion ROBERT BROGAN, Assistant Director for Competition Analysis PAULINE IPPOLITO, Assistant Director for Industry Analysis JAMES M. FERGUSON, Assistant Director for Antitrust This Report has been prepared by the Bureau of Economics of the Federal Trade Commi ss ion. I t has not been reviewed by, nor does it necessarily reflect the views of, the Commi ss ion or any of its members. -i i- ACKNOWLEDGEMENTS The authors would like to thank the many members of the Bureaus of Economics and Competition who reviewed various drafts of this report and who provided valuable assistance during the time this report was prepared. In particular, we would like to acknowledge the assistance of Denis Breen, Robert Lande, William MacLeod, Jerry Philpott, and David Scheffman in reviewing the manuscr ipt. In addition, we would thank Edward Gallick, whose own work on taxicab regulation stimulated our thinking on the subject. Finally, we would like to thank Pamela Armiger and Paul Abraham, who typed several of the drafts, and the Bureau of Economics Word Processing staff, who prepared the final version. -i i i- ................................................ ......... .............................................................. ... ...... .................................... ............. ........... ............................................... ........... .... ... ......... .......... ...... ........ ..... .. .... CONTENTS Page Introduction and Policy Conclusions. Arguments for Regulation....................................... Costs of Regulation...................... Experiences with Regulatory Reform. Outline of Report.................. .SA.. II. The Taxicab Industry... The Role of the Taxi. Market Segments.... 1. Cruising' Cabs........... 2. Taxicab Stands........ 3.. Radio-Dispatched Cabs................................................ 4. Contract Services 5. Relative Sizes of Segments............... Firm Organi zat ion. Forms of Regulation.................................................... 1. Entry Regulation........ 2. Fare Regulation.. 3.. Service Restrictions............... 4. Service Requirements. Quality Regulation............... III . Theoretical Mode 1 Taxicab Market.. IV. Rationales for Regulation. Potent ial Sources of Market Fai lure. 1. Congestion and Pollution Externalities....... a. Congestion....... ... b. Air Pollution............................ Overpricing of Public Transit. Indeterminacy of Cruising Equilibrium........ Impediments to Price Compet it ion. a. Cruising Cabs............................ b. Taxi Stands... Bargaining over Price.. Economies of Scale.... Informational Problems....................... Waiting Time Externalities...... Inefficiently High Taxi Fares................ a. An Extreme Example: An Airport.......... b. Another Example: Air 1 i ne Regu lat ion. c. Radio- Dispatch and Cruising Segments.. -iv- . ... ..... ............. .. ... .... ... ... ... .... .... ...... .. .... ...... ...... .. .. .. ......... .... .. .................. ..... ................ ............................................ .. ... .... .. ......... ..................... .................................................................. .... .. ........ ... .......................... .................... .. .................. .. .. ... .... ... .. ...... ........ Page 10. Mispricing of Taxi Trips...................... 11. Enforcement of Taxi Regulations........ 12. Conclusion.......... ...... Regulation in Practice.. 1. Motivations for Regulation... a. Protection of Public Transit and Taxis. b. Promotion of City Image................. Self-Interest of Regulators. Quality of Taxi Service...... Other Suggested Justifications for Regulation. ................... History of Taxi Regulation.................... Economic Effects Regulation............. Effects I ndustri al Structure.. Franch ises.. 2. Numerical Restrictions on Taxicabs... 3. Allocation of New Licenses.. 4. Firm Size and Service Requirements. Effects on Industry Performance........ 1. Fare Level............................. 2. Number of Cab Hours of Service.. 3. Waiting Time.... 4. Number of Trips. 5. Quality of Service....... 6. Cost of Producing Cab Service. 7. Allocation of Cabs....................... 8. Types of Service.................. 9. Effects on Other Markets Effects on Efficiency of Resource Allocation. Effects on the Distribution of Well-Being. 101 1. Los e- 5 . 101 a. Consumers. .. IO.. 101 b.. Workers. IO" .. IO. IO.. IO.. ... .. .. 104 c. Ta.xpayers.... 105 Gainers. 105 Inf erences from Medallion Prices.... 105 VI. Regulatory Reform. 112 Motivations for Regulatory Reform................. 112 Effects of Regulatory Reform...................... 113 1. Radio-Dispatched Market Segment............... 114 Industrial Structure...................... 115 Fare Level.............. 115 Number of Cab Hours of Service. 116 Waiting Time................... 117 . ..-- . .. ............. .. .. .. .. .... .. .. ............. .. ... .. .. ... .. ... .......... .. ......... .. ............... .. .. .. ............. ............ .. .. ....... .. .... .. Page Number of Trips.......................... 118 Quality of Service....................... 118 Cost of Administering Cab Regulations.... 119 Alloea t ion of Cabs....................... 120 Types of Service......................... 121 Conges t ion. 121 k. General Reactions to Regulatory Reform... 121 Airport Servi ce. 123 Additional Considerations............... 124 Case Studies of Regulatory Reform....... 125 a. Seattle. 125 b. San Diego........................... 132 Oakland and Berkeley..................... 136 Phoenix and Tucson....................... 141 Other Experiences with Regulatory Reform. 144 1. Atlanta.... .......................... 144 Indianapolis..... 146 Port land. 148 Pres no. 150 Spokane. 151 Sacramento...................... 152 Charlotte.............. ...... 153 VII. Conclusion.... 155 Appendix A. Elaboration the Theoretical Model.. 157 Appendix B. Empirical Estimates of the Demand for Taxi Service................................ 162 The Demand for Taxi Rides.... 162 a. Fare Elasticity.......... 162 Waiting-Time Elasticity................... 165 c. Income Elasticity......................... 165 Substitution Between Taxis and Other Services. 166 The Value of Waiting Time..................... 167 Bibliography. 169 vi- ...................;,.... LIST OF TABLES Page Table 1 Taxicab Licensing............................... Table 2 Taxi Regulations in u. s. Cities with Populations over 100, 000..............., Table 3 Ranking of Cities by Fare for Three-Mile Taxi Trip by One Person, 1984.... Table 4 Fares in Washington, D. C., and Eight Other Cities, 1984............................ Table 5 Prices of Taxicab Medallions..... :i............. 106 Table 6 Estimates of the Fare Elasticity of Demand for Taxi Rides.................................... 163 LIST OF FIGURES Figure Mode 1 Taxi Market Fare-Service Space.... Figure Mode 1 Taxi Market with Entry Restriction... 110 Figure Mode 1 Taxi Market Service-Rides Space... 158 vii- INTRODUCTION AND POLICY CONCLUSIONS The taxicab industry is heavily regulated, mainly by local governments. Entry, fares, services, and qual i ty are restr icted in a substantial majority of large urban areas. However, a number of cities have recently deregulated entry, fares, and some aspects of service. This report provides an economic analysis of these taxicab regu lat ions and experiences wi th regulatory reform. The principal conclusion of this report is that no persua- sive economic rationale is avai lable for some of the most important regulations. Restrictions on the total number of firms and vehicles and on minimum fares waste resources and impose a disproport ionate burden on low income people. A number of cities have achieved favorable results by deregulating entry and minimum fares in the radio-dispatched market segment, which typically accounts for around 75 percent of all cab trips. Similarly, there is no economic justification for regulations that restrict shared-ride, dial- ride, and jitney service. By contrast, potential market failures provide a credible theoret ical rationale for some other types of regulat ions, including fare ceilings and regulations dealing with vehicle safety and liability insurance. Most of the problems cities have experienced with taxicab regulatory reform can be traced to high fares at airport cab stands. There are several ways to deal with these problems, including revisions in the first-in-first-out queue system, improvements in fare posting requirements, increased cab line user fees, or lower fare ceilings. Finally, some regulations might conceivably