Don’t Cry for the Former Taxi Monopoly

23 Friday Mar 2018

Posted by pnuetz in competition, monopoly, Technology, Uncategorized

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Cartel, Consumer Surplus, Creative Destruction, Human capital, Lyft, Mark Perry, Ride sharing, Taxi Medallions, Taxi Monopoly, Uber, Warren Meyer

It would be odd to argue that innovation is not unequivocally positive, that its costs will exceed its benefits. Certainly there are downsides: human capital invested in the methods and technologies supplanted by an innovation is devalued, jobs may be lost, retraining becomes necessary, and even consumers must get used to new ways of doing things, which is not costless. But most of these costs are temporary. And when an innovation eliminates an incumbent’s monopoly, the former monopolist’s profit ends up back in the pockets of consumers.

People do seem to focus excessively on the downside of innovation without carefully tallying the benefits. For example, this article focuses on the loss of New York City taxi pickups since ride sharing services like Uber and Lyft began to have an impact in 2014. Mark Perry reproduces a chart from that article, which is featured above. The number of monthly taxi rides in NYC has fallen by about one-third since then, from an average of 13+ million to about 9 million in 2017. In fact, Perry reports that the market for taxi medallions has tanked since then as well, with plunging medallion prices and many medallions sold out of bankruptcy and foreclosure. But don’t be too quick to shed tears for a monopoly lost.

The same chart shows the massive upside to ride sharing, as discussed here by Warren Meyer. The size of the total market has nearly doubled, from about 13 million per month to roughly 24 million (adding the two lines together). And it was a quick transition! That’s what happens when real competition is introduced to a market: prices fall and quantity increases, with an attendant increase in the welfare of consumers. That increase always exceeds the loss suffered by the former monopolist or cartel (as the case may be), which was earning excessive profits at the expense of consumers before the innovation had a market impact. And many former taxi drivers have made the switch to ride sharing providers, and they seem to prefer it for the flexibility and autonomy it offers. Yes, the best innovations benefit workers as well as consumers.

Competition can bloom when government opens markets to competitors or when an innovation creates new alternatives for consumers. In the case of ride sharing, both were necessary. For many years, NYC restricted the supply of taxi medallions, which kept taxi fares artificially high. The formal approval of ride sharing services in the city was not uncontested. But once it was approved, consumers took advantage of superior dispatching and payment technologies enabled by their smart phones, as well as security features and rating systems, not to mention lower fares. Again, these developments have contributed massively to consumer well-being, which is ultimately the point of all economic activity. Traditional taxis have to try to keep up. The ride sharing industry has inflicted the kind of creative destruction for which consumers are quite grateful.

Sharing Apps and Market Benefits

24 Saturday Jun 2017

Posted by pnuetz in Markets, Transaction Costs

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Airbnb, Allocative efficiency, competition, Double Coincidence of Wants, Medium of Exchange, Michael Munger, Property Rights, Ride sharing, Sharing economy, Transaction Costs, Transactions Technology, Uber

Transaction costs prevent lots of trades. So many that we often aren’t aware of their potentiality. Michael Munger asserts that transaction costs are so prohibitive that we tend to accumulate a lot of stuff that we could otherwise do without. That’s what he says in “Why we can’t break up with our stuff — yet“.

Transaction costs of all kinds have fallen dramatically over time. One of the greatest innovations in “transactions technology” was the avoidance of barter with the broad acceptance of a medium of exchange (money). Without a medium of exchange, trade requires a “double coincidence of wants”, which often makes the effort to engage in trade impractical. No less important was the establishment of secure property rights such that the integrity of a contract or transaction was protected, whether enforced by possible repercussions from other traders or through the police power of the state. Secure property rights and the use of money facilitated the development of markets and pricing that conveyed better information about scarcity. Other historical developments that reduced transaction costs include better transportation, communication, packaging, and more efficient distribution and supply chain management. In a variety of complex transactions, such as real estate, standardization of contracts has reduced transaction costs.

Those costs have been reduced dramatically of late by new communication and computing technologies. The size of these reductions is difficult to quantify in such prominent examples as Uber ride-sharing and Airbnb home-sharing, but there is no question that the new supplies of rides and accommodations would not have materialized absent the enabling on-line “apps”. The ease, low-cost and minimal risk of these transactions is incredible.

Suppose that hotels in Soho average $400 per night for a suite and that Airbnb rentals in Soho average $300. It’s fair to say that the average Airbnb host in Soho, without Airbnb, faced transaction costs in arranging for qualified occupants of at least $100 plus Airbnb’s fees. Probably much more. Now, it’s true that the hotel suites and the Airbnb rentals are fundamentally different “products”, but they are alternatives for meeting a particular need.

Similar reductions in transaction costs are occurring across a wide variety of sectors besides transportation and vacation rentals: trading in new and used goods, handymen, concierge services, snow plowing, home-sitting, food delivery, and hook-ups are but a few examples.

Munger’s twist on this story is that dramatically lower transaction costs will mean we’ll all need to own much less “stuff” on average, because we can “share”, or at least buy what we need at minimal transaction cost. Or, what we have will be used more intensively because we can share it profitably.

Munger mentions the high cost of owning an auto that he uses for about 5 out of 168 total hours in a week. The costs include dedicated “storage” space, both at home and at work, and sometimes the extra cost of “storing” it in airport parking. He could certainly afford to arrange alternative forms of transportation. Is owning the auto worthwhile because the transaction costs of the alternatives are too high? Well, Munger owns a nice car and he probably likes to drive it, so there is more to it than transaction costs. Still, if we mention the “convenience” of having a car at one’s disposal, that is really an expression of transaction costs avoided via ownership.

If the cost of arranging an acceptable and ready alternative is minimal, why own a car? This decision is very real in certain congested locales with costly real estate (e.g., parking New York City). In short, Munger believes even fewer individuals will bother to own personal autos, or that those cars will be less idle (rented to users), as technology reduces transaction costs:

“Why do I pay to store my car rather than let other people use it and collect rent? Transaction costs. …But we are living in the beginning of a pivotal era that will transform our relationship to ‘stuff’ (we’ll need less of it) and to each other (we’ll share more). For all of human history until about 1995, the desire to reduce transaction costs was tied to the desire to sell a particular product. Now, entrepreneurs are combining three things — mobile platforms, software apps, and internet connections — to sell reductions in transaction costs with no product attached. And that combination will change everything.“

Will that also mean fewer personally-owned kitchen appliances? Home furnishings? Clothing? Power tools? Stereo components? Probably not. Even if it’s easy to find a willing renter for my power tools or stereo components from time-to-time, I might not want to bother with the required exchanges (at pick-up and return). I use power tools from time-to-time, but I won’t want to shlep back and forth to rent them from someone when I could own them myself at relatively low cost. Perhaps I’ll rent a tiller or a power washer, but not a power drill. Maybe I could hire a gopher on the Air-gopher app to get the tools I need and return them when I’m done, but that adds back to my transaction costs. So there are certain limits to how far this can go in reducing our “stuff”.

Nevertheless, there is no question that there will be many new trades and competitive opportunities to exploit as transaction costs fall, and that implies more choice, lower prices, and less waste in the larger allocative sense. Those, I believe, are the major benefits of sharing technologies. For example, if you enjoy cooking but are the sole member of your household, imagine an app that allows you to sell your extra preparations to other individuals, or to give them away at a minimal transaction cost. Or, if you are able to perform odd jobs but prefer to take them at your convenience, you will likely be able to bid for projects of your choice. If you have a talent for teaching guitar, you could solicit business and even provide the lessons remotely through an on-line app. The major impediment to the development of such market innovations is potential interference by government or other entrenched interests who wish to prevent competition. Licensing laws and various forms of regulation and taxes could easily smother or eliminate the benefits of sharing technologies, and that would be a shame.

I’ll close with a digression on Munger’s hypothesis: why do I own or keep a lot of “stuff? It’s not all about transaction costs. Most people harbor nostalgic feelings for their “stuff”. I hate parting with my old shirts, old drivers licenses, theater programs, and ticket stubs. Most of those things have approximately zero market value. Some people believe it’s just plain wasteful to pitch something that can be put back into working order, like an old lawnmower. Transaction costs might be to blame, but the failure to junk the mower in the first place may be driven by a depression-era instinct for penny-pinching. The hoarder might simply underestimate the benefits of a new mower, or perhaps they deserve credit for undertaking a restoration project they enjoy.

I find myself hoarding all kinds of things that I think might be useful to me somehow, someday. Particularly things like miscellaneous nuts & bolts, sundry pieces of hardware, wire, old fixtures, pieces of lumber, and my late Dad’s old tools. I’m certain I won’t ever use 95%+ of these items, but it’s reassuring to have the inventory. Then again, every time I need an odd item, I find myself in my basement work room searching through all that stuff. Invariably, I end up on my way to the hardware store to get what I need. So much for minimizing transaction costs. What would it cost me to pitch all of it? An afternoon of painful evaluation… yet that too represents a transaction cost!

Government Wants To Gut Your Gig

24 Friday Jul 2015

Posted by pnuetz in Big Government, Regulation

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Bill De Blasio, Economic conservatism, Erik Sherman, Gig economy, Hillary Clinton, Megan McArdle, Overtime rules, rent seeking, Sharing economy, St. Louis Metropolitan Taxi Commission, Taskrabbit, Taxi deserts, Uber

Big government is an inherently conservative enterprise when it comes to protecting the economic status quo. It frequently acts on behalf of entrenched interests by quashing innovation and competition. This is well illustrated by resistance to the “gig economy” (or “sharing economy”) and companies like Uber and Taskrabbit. The gig economy is growing rapidly because it is often more affordable than traditional channels and it offers tremendous convenience. Enabled by the internet, customized tasks or “gigs” can be performed anywhere for anyone demanding them. My son in New York City just found a talented carpenter through an on-line app, who stopped by his apartment in the evening and mounted a big-screen TV on the wall. The service he provided was not new, but the deal was facilitated and even enhanced by technology in a way that in some cases is reordering economic relationships. The competitive pressure this can create is drawing resistance with the aid of government power.

In St. Louis, there is an ongoing conflict between the Taxicab Commission and Uber, which has not yet gained entry to the market. Three of eight members of the commission own cab companies. They have succeeded in keeping Uber and Lyft out of the market for over a year. A resolution might be possible soon, but the commission is still haggling with Uber over insurance coverage levels, fingerprints and background checks.

On the national stage, the biggest issue surrounding the gig economy is the formal relationship between workers and any company they might represent. Should those workers be treated as independent contractors or employees? Companies like Uber insist that their drivers are independent, but the government would prefer that they be treated as employees. In some cases, that would oblige employers to offer certain benefits. Erik Sherman covers this issue in “How the U.S. Just Knee-Capped the ‘Gig Economy’“. According to Uber, most of its drivers are part-time and like it that way, so it’s not clear that the government can force Uber (under current rules) to pay for extra benefits, or how many of its drivers that would affect. Still, it is instructive that the government is applying pressure in this area, potentially undermining competitive forces and voluntary relationships formed between innovative businesses and their working partners.

Big government advocates are extremely uncomfortable with the gig economy, but there are a fair number of progressives who place a high value on their ability to transact with “gigsters”. Politicians such as Hillary Clinton, who “skewered” the gig economy last week, risk fracturing their own base by advocating steps that could threaten innovative enterprises like Uber. In another statist attack on Uber, New York Mayor Bill De Blasio recently proposed to “cap” the company’s growth while the city studied its impact on traffic. Fortunately, he has backed down.

Progressives should love the value that the gig economy brings to segments of society whose members otherwise can’t afford or can’t access traditional services. For example, residents of low-income neighborhoods often find themselves living in “taxi deserts” when forced to rely on the entrenched cab companies. Megan McArdle makes this point in “Uber Serves the Poor by Going Where Taxis Don’t“. Aside from the technology angle, this is basic capitalism in action. When government steps in to restrict the conditions under which services may be offered, and raises the cost, it lends a degree of monopoly power to the entrenched providers and blocks the diffusion of services to all segments of the market. This should be seen as antithetical to the progressive agenda, but politicians and cronies don’t always see it that way.

The advantages of the gig economy have been made possible by technology, but another key element is that it has unleashed a flood of voluntary activity to fill gaps that were heretofore inadequately addressed. There have been some principled objections to the business practices of Uber and other gig sponsors, which often involve details regarding the splitting of revenue. Despite these concerns, there are benefits to workers who choose to participate, including a great deal of flexibility in choosing working hours and conditions. Second guessing their motives and the opportunity costs they face is a purely speculative and presumptuous exercise. Furthermore, on other fronts, government has been engaged in a seemingly intentional effort to make only part-time work available, as with recent changes in overtime rules and Obamacare regulations; at least the gig economy fits into that framework.

Traditional service providers, some of whom enjoyed government-enforced monopolies, have reacted to new competition by calling for protection. This rent-seeking behavior is typical in the history of regulation, which has often taken root under strong pressure for protection by entrenched interests. Progressives should reject this perverse form of economic conservatism.

Sacred Cow Chips

Tag Archives: Uber