Blogging the 2016 ASSA conference. UBER and the still thriving competition
At the 2016 ASSA conference David Gabel has a paper about competition between taxi’s. What I like very much about it is how he shows how seemingly trivial details have a decisive influence on market power (which on a ‘deeper’ level indicates that regulating markets is a very daunting task which not just requires textbook knowledge but also common sense, in depth knowledge of the sector and a little sense of history).
Three Lessons for Policy Makers
The preservation of the medallion’s value is explained largely by the regulatory prohibition that bans TNCs from picking up street fares. While, on the surface, it would appear that hailing a ride on the street or using a smartphone to arrange pick up would be near-perfect substitutes, it turns out that the prohibition against TNCs accepting street fares has created significant market power. This illustrates a common business practice—using the regulatory process to inhibit competition and to sustain supra-competitive prices.
Second, proponents of the deregulation of utilities have argued that the threat-of-entry would drive prices down to a competitive level. We see in the local transportation market that the threat of entry is not a sufficient condition for obtaining competitive rates. While the theory of contestable markets has suggested that entrants would capture the entire market through prices that are epsilon lower than the incumbents’ prices, the taxi industry illustrates that incumbents do not necessarily reduce their output when faced with rivalry. As a result, the entrants, rather than capturing the entire market, may be left serving the residual portion of the demand curve.
Finally, property taxes are set based on the value of the property. Property value is based on cost, discounted cash flow, or the sale of comparable assets. Cost is often measured by estimating the cost of a similar property that employs state-of-the-art technology. Modeling the cost of using state-of-the-art technology often results in a lower cost estimate than would be obtained by using currently employed technology. The recent history of the taxi industry illustrates how markets frequently do not quickly embrace new technologies and therefore a valuation based on new technology may not properly reflect the worth of the property.
It is conceivable that, in the future, the Internet-based call service could eliminate the rents earned by medallion owners. Still, while it seems that there is only a trivial difference in the convenience associated with hailing a cab, versus arranging for service through an app., the persistence of monopoly power suggests that estimating value by modeling state-of-the-art technology could result in underestimating the economic value of an asset. That the adjustment process to a new equilibrium has not been properly anticipated is not surprising, in light of the way in which technical change is modeled in economics textbooks. More efficient technology is modeled as a shifting outward of the supply curve to a new equilibrium, in which price has fallen and output has increased. However, microeconomics textbooks do not address the path from one equilibrium to another, or the time involved in this transition.