Blog Post

AEIdeas

When government agencies or heavily regulated industries are insulated from market competition, the incentives to offer better service and lower prices, along with the incentives to innovate, upgrade and improve are either significantly weakened or non-existent. But when faced unexpectedly with some market competition, it’s amazing how the normally sclerotic, anti-consumer and unresponsive government agencies or protected industries can suddenly become responsive and consumer-friendly. Here are two examples:

1. The Kelston Toll Road in the UK. I reported last August on CD that an entrepreneurial UK grandfather built a 400-yard private toll in just ten days that allowed drivers to bypass a 14-mile construction detour. A landslide last February closed a road between the towns of Bristol and Bath and construction was originally scheduled to take until last Christmas to complete. The private owner was therefore expecting toll revenue through December to cover his $500,000 in construction and repair costs, along with the cost of staffing a toll both 24 hours each day, and hopefully generate some profit for his entrepreneurial efforts.

But the local government, possibly unhappy with the competition from the private toll road, suddenly made an emergency decision to spend an extra $1 million to speed up the road construction project, which was completed six weeks ahead of schedule in mid-November. Now the toll road entrepreneur and his wife are upset and have accused the local government of trying to bankrupt him with the early opening of the road five weeks ahead of schedule. And perhaps the road construction would have been completed early even without the private toll road, but it seems pretty likely that the presence of competition from the private toll road may have imposed some additional incentives that changed the normal “we don’t care, we don’t have to” attitude of the local civil servants (who often are neither very “civil nor “servile”).

2. Big Taxi vs. Uber. After being protected from competition for generations by government regulations that restrict the number of traditional taxis in most major cities like New York, Chicago and LA, the “taxi cartel” has recently come under competitive pressure from new ride-sharing services like Uber and Lyft that offer consumers a transportation alternative to taxis at lower prices and with better, faster service. Suddenly, the traditional, sleepy taxi industry is being forced to act and think more competitively in response to the upstart ride-sharing services, which is behavior that is completely alien to an industry that never faced the discipline of market competition before. For example, the LA Times is reporting that:

All taxicab drivers in Los Angeles will be required to use mobile apps similar to Uber and Lyft by this summer, according to a measure passed by the Los Angeles Taxicab Commission this week. The order, passed on a 5-0 vote, requires every driver and cab to sign onto a city-certified “e-hail” app by Aug. 20 or face a $200-a-day fine. The move is seen as a way to make taxicab companies more competitive with rideshare apps such as Uber and Lyft. Los Angeles cab companies reported a 21% drop in taxi trips in the first half of 2014 compared with the same period the previous year, the steepest drop on record. Cab companies largely attribute the drop to the popularity of app-based ride services. William Rouse, general manager of Yellow Cab of Los Angeles, says his company has utilized a mobile app for several years. The app, Curb, allows riders to hail and track a cab, provide payment and rate drivers. “If our industry is ever going to get a chance to move passengers from Uber back to taxis, each one of these companies should have an app,” Rouse told The Times. “It’s a shame that the city had to mandate it in order for this to happen.”

Last summer, ABC News reported that:

Meet the new secret weapon to get a leg up in the cutthroat competition among cabbies — charm school. Taxi drivers in Washington state are getting lessons that they hope will give them an edge against startups such as Lyft and Uber. About 170 taxicab operators paid $60 out of their pockets for a four-hour training session to learn about topics including customer satisfaction and developing relationships with institutional clients.

Pretty amazing how the taxi cartel is suddenly starting to change the way it operates now that its drivers are facing intense market competition/discipline from Uber and Lyft.

Bottom Line: Perry’s Law says that “competition breeds competence.” These two cases above help to illustrate that principle, and provide examples of how direct, ruthless, even cutthroat competition is often the most effective form of regulation, and provides the intense discipline that forces firms to maximize their responsiveness to consumers. To maximize the competence of producers and suppliers, we have to maximize competition, and to maximize competition we usually need to reduce the government barriers to market competition like occupational licensing and artificially restricting the number of taxis that are allowed to operate in a city. In other words, we need to move away from the ubiquitous crony capitalism that protects well-organized, well-funded, concentrated groups of producers like the taxi cartel, barbers, funeral home operators, and sugar farmers from market competition. Government regulation typically reduces competition, which then reduces the competence of producers, and reduces their willingness to serve consumers and the public interest, which make us worse off. I say the more market competition the better, for consumers and for the human race. As Bastiat pointed out in 1850: