An Economics Lesson on Ride-Hailing in British Columbia

Commentary by Benn Proctor and Rhys Kesselman,

Did you know that Vancouver, Canada is the most populous region in North America without operations from ride-hailing firms like Uber and Lyft? The current contest between Vancouver's taxi industry and incipient ride-hailing services provides a good lesson in some key economic concepts. On economic grounds and the public interest, the case for permitting ride-hailing competition in British Columbia is strong. 

Oligopoly profits. Monopoly is a familiar concept — a market with just a single supplier. Protected from competition, a monopolist typically sets a high price and earns “monopoly profits.” At the other pole is a firm with many competitors and free entry by others; this process bids down prices to cover actual costs of production, so that profits are minimal. Lying between those market types is the oligopoly, characterized by few firms with limited entry by potential competitors. Oligopoly firms often cooperate to increase industry profits at the expense of the consumer.

B.C.’s taxi industry is clearly an oligopoly, as witnessed by the small number of companies in each municipality. For example, the City of Vancouver has just four taxi firms licensed to provide service. The companies behave more like collaborators than competitors. Under their umbrella Vancouver Taxi Association they file joint applications to add licences proportionate to their existing market shares, support moratoriums on new competition and make substantial political donations.  

Capitalization. Taxi-licence values offer direct evidence of the extent of the industry’s oligopoly profits. A B.C. taxi company needs a government licence to operate each vehicle legally. Licences are restricted in number, but can be traded in the marketplace. If the market were competitive, each taxi would generate little profit beyond its operating costs, and licences would have little value. In fact, taxi licences in B.C.’s major cities have huge values; a licence to operate a single taxi in Vancouver at times has been worth nearly $1 million.

The value of a taxi licence reflects the stream of all expected future profits. Pricing operates like a bond or a rental property; the anticipated future returns to the asset are capitalized into the price that a buyer is willing to pay. High licence prices reflect current and future above-normal profits expected by taxi operators. This value is influenced by the supply of new licences, regulated fare levels, and expectations about future events.

Regulatory capture. When an industry is naturally uncompetitive, the public interest demands some form of regulation to ensure that price and service levels are reasonable. However, B.C.’s taxi industry is oligopolistic only because the public authority limits the number of licences; with free entry, the industry would become far more competitive. As a result, the current oligopoly profits would vanish, wait times for taxis would decrease and passenger fares would decline.

The prohibition of ride-hailing in B.C. is a textbook example of regulatory capture — a situation where the public authority becomes “captured” by the interests of the group it’s supposed to regulate. Capture can occur via group voting, lobbying, campaign contributions, corruption and other means.

Regulatory capture is further exhibited by the near-exclusive issuance of new licences to incumbent firms — and at virtually no charge. Case in point is the April 7 decision to allow Vancouver’s four companies to add 175 taxis to their fleets. If each licence is valued at a reported $800,000, this was a windfall transfer of $140 million. In contrast, provincial fees to add the 175 taxis totalled less than $10,000.

Labour market. Media reports insinuate that the big losers from ride-hailing competition would be B.C. taxi drivers. This picture is highly misleading. Most drivers rent the use of vehicles from licence owners and must pay stiff fees for that privilege. For example, paying a typical $120 lease fee for a 12-hour shift plus gas costs, drivers may at times net less than minimum wage. Much like the million-dollar Tim Hortons franchisee pays the barista a modest salary, licence owners and not drivers reap the oligopoly profits.

The introduction of ride-hailing is unlikely to affect a driver’s income, as the loss of taxi passengers will lower the lease rates charged by taxi owners; otherwise drivers themselves will shift over to the ride-hailing sector. While hourly earnings are likely to remain flat, industry employment could increase significantly as service improvements and fare reductions encourage greater use of hired-car services. 

Externality. An economic externality occurs when a producer or consumer doesn’t bear the full costs of their own actions. If B.C.’s regulated taxi transport is overly costly and unreliable, more individuals will buy private vehicles, imposing traffic congestion and air-pollution costs on others. Greener trips like using public transit are also discouraged since paying a taxi for the “last leg” of a commute is prohibitive.

An even more striking negative externality results from rules that forbid B.C. taxis from picking up riders outside their home municipality. For example, a Surrey metro taxicab can only take passengers into Vancouver; absurdly, it must return home empty. This “dead-heading” raises taxi operating costs, congestion and pollution.

Consumer sovereignty.Surveys of the B.C. public indicate a strong preference for allowing ride-hailing services. A key concept in economics is consumer sovereignty — the notion that consumers know best their own wants, and that they should be allowed choice unless that creates significant adverse effects. Even with basic vehicle and driver-safety regulation, ride-hailing would provide the public with faster service and lower fares.

We don’t compel consumers to dine in expensive high-end restaurants; they’re also free to choose mid-level or even “hole-in-the-wall” options, so long as all meet basic food-safety standards. Similarly, sovereignty suggests that consumers should be able to choose their desired mode, level and cost of travel services.

Compensation. A policy change is deemed to be economically efficient if the gains exceed the losses to various parties. Sometimes this notion is construed to support compensation for the losing parties. Opening up B.C. to ride-hailing services would decrease the values of taxi licences for the incumbent holders; the extent of these losses hinges on the regulatory costs imposed on the new ride-hailing services.

Whether compensation should be paid to taxi-licence-holders losing value with the entry of ride-hailing is both a political and ethical issue. However, those who have held their licences a long time have gained massively by persuading politicians to limit competition. Those who have bought existing taxi licences at inflated prices in recent years, sometimes with financing, would be most harmed.

The policy challenge. The only substantive obstacles to permitting ride-hailing services in B.C. are the opposition of licence-holders and their claims for compensation. The worst outcome for passengers would be to so burden the ride-hailing industry with costly rules that their fares weren’t much below taxis, such that few drivers would join the new sector.

Rather than accede to the taxi industry’s attempts to obstruct an active ride-hailing industry in B.C. by calling for a “level playing field” that would increase costs for the new entrants, public policy should find ways to decrease costs for the incumbents. An attractive first step would be to phase out the senseless dead-heading caused by the home-area, pick-up restrictions. Time and fuel savings would improve taxi productivity and enable taxis to better compete with ride-hailing vehicles.

Overcoming the entrenched interests and opposition of current taxi-licence-holders — and their allies in and out of government — may require further forms of compensation or “sweeteners.” Nevertheless, keeping the status quo with the B.C. taxi industry protected from ride-hailing competition is unjustifiable on elementary economic grounds and adverse to the public interest.

Benn Proctor is a program associate with the Wilson Centre’s Canada Institute, Washington, D.C., and Rhys Kesselman is a Canada research chair with Simon Fraser University’s School of Public Policy. Proctor’s SFU Masters of Public Policy thesis is available online. A version of this article was previously published in the Vancouver Sun on Nov 3, 2017.