Govt Restrictions Stifle Competition Among Taxi Drivers in HK

Taxi service in Hong Kong is terrible. Drivers grumble about long- and short-rides alike. They refuse trips crossing the harbour, likely due to the congested tunnels. They operate in the Middle Ages manner with no GPS nor google map, and insist in payment by cash (Note 1). Every Hongkonger longs for something to compete or even replace it.

Then, Uber came to the town. You need a licence to operate paid-rides in the city, and ironically, the type of licences suitable for shared-rides does not even exist (Note 2). Uber chose to crash the gate anyway and immediately earned enormous support from riders. Despite the government’s enforcement actions, many in society including the consumer rights watchdog (Note 3) suggested legalising Uber and other similar online pre-booking car-hiring services.

While it is obvious that new services may enhance taxi service through competition, they do come with social costs (Note 4). To me, the economic questions are why the taxi service market operates like those by a sole provider and individual taxi drivers do not compete with each other and whether there are ways out.

Taxi Drivers Do Not Compete with Each Other

From Microeconomic 101, we learn that in a market with many players, they compete with each other on price to gain market share and therefore more profit, until the price reaches a point that everyone earns zero economic profit (Note 5). This is usually referred to as a perfectly competitive market.

For the taxi market in HK, 18,000-odd players (Note 6) do not yield a perfectly competitive market. The theoretically independent players do not compete at all. I opine that this is caused by the restrictive government policies.

Poor Licensing Regime Is Not the Culprit

Taxi service is a licensable activity in HK. The licences are permanent in nature and it is difficult for the government to revoke a licence. Moreover, the government had literally cceased to issue new licences since 1998. Market prices are now around HK$6 million (around US$ 0.77 million) for a single taxi licence in the second market. Mind you that a licence only grants you the right to operate taxi services, you still need to bare all other costs for buying a taxi, etc.

Licence holders are not obliged to operate the taxis themselves. They may lease them out to those having taxi driving licences. The majority licences are held by individuals despite some big taxi companies are holding multiple licences. Holders set the car rental at a fixed rate. Drivers thus have incentive to earn as much as possible within his shift. Taxi fares on the other hand are fixed by the government.

Some attribute the lack of competition in taxi market to the licensing regime which gives no incentive for licence holders to perform well with the permanent licence and the government policy for not issuing new taxi licences in place. They suggested that licence holders tend to hoard the licence for selling instead of actual operation. But this does not make economic sense. Despite the price surge, licence holders earn nothing until they sell the licence but they need to pay for maintaining the taxis. As such it is more likely that licence holders have incentive to lease out their taxis.

Some blame the limited number of licence holders making the market not competitive though the figures show otherwise (Note 7). Moreover, it does not make economic sense either. Even if there were only a few licence holders in the market, they might affect the rental level but not the downstream service market, since drivers should still have strong incentive to compete in order to earn more.

Operation Requirements Kill Competition

I therefore believe that the poor taxi service in HK is caused by restrictions in relation to the downstream operation level, and two of them may be the culprits.

To start with, taxi fares are fixed by the government. You may say that this is the norm around the world, but yet that in HK is rigidly set that drivers could not offer discounts. In New York and London, taxi fares for rides outside the New York city and Greater London are negotiated between drivers and riders. In Bristol, the meter fares are merely the maximum that could be charged (Note 8).

The fixed taxi fares make it impossible for individual drivers to compete by giving discounts, prohibiting any form of price competition. Yet there have been taxi drivers offering 20% discount off the meter rates illegally. This particularly attracts long distance riders due to the large saving. Instead of encouraging the discount by amending the law, the government clamps it down making discount offers go underground.

I believe removing the fixed fares restriction would enhance better taxi services. Some drivers may have incentive to offer discount as well as better services for, especially, long haul riders in exchange for a group of loyal, regular long haul riders giving them stable incomes. This may help reducing the need for them to hail on the streets or to queue at taxi stands for random and short distance riders, creating competitive pressure for those neither offering discounts nor good services.

Another problematic measure is that all taxi must have the same appearnace. If pre-booking is the most popular way for hiring taxis, competition among different taxi companies may still survive. However, pre-booking is the last resort for riders to find a taxi in HK. Some riders even switch back to public transport when they fail to find a taxi on the street. When all taxis are having identical appearance, those on the streets would not be able to tell the difference between taxis with good services from those with poor services. When good services do not give better returns, taxi drivers have no incentive to offer them in the first place.

The combined effect of a rigid tax fares and identical appearance of the taxi make it impossible for drivers to compete by either lower price or better services. Whether taxi drivers could earn more hinges on their luck on the streets or at the taxi stands. The rational responses of taxi drivers then are doing tricks to reduce unfavourable rides, such as those crossing the harbour or to congested areas. They also insist on cash payment to make the tax bureau harder to trace their income level.

Give Correct Incentives to Drivers

The government appears to try to address concerns of poor taxi services by introducing the so-called “premium” taxi services with higher fares, but it misses the point. There will be too few a number of premium taxis (600 premium taxi vs 18000 ordinary taxi) and too expensive the fares to compete. Riders would just bet their luck on ordinary taxis. To address the problem, the government should work on giving taxi drivers correct incentives by removing the restrictions on fixed charges first, and then identical appearance later. Should the government does it correctly, the taxi service market should demonstrate the merit of a perfectly competitive market.

Note

1. Recently, some taxi started accepting Wechat payment. Credit card is still not accepted.
2. There is a type of hire-car licence in Hong Kong but applying for this, the operator needs to submit the contracts with its customers, which is not feasible for Uber case.
3. Consumer Council’s research report: More Choices Better Service — A Study of the Competition in the Personalised Point-to-point Car Transport Service Market
4. For instance, if Uber or other hiring services are permitted in Hong Kong, more may have incentive to buy car for providing the service. This would then call for more parking spaces and more roads, which would compete with the demand for lands for housing and or commercial purposes already lacking.
5. It should be noted that economic profit differs from accounting profit, as the former takes care of opportunity cost as well. Zero economic profit may means positive accounting profit.
6. There are more than 18,000 tax licences in Hong Kong. Taxi are allotted to drivers by a fixed rental. There may be far more taxi drivers since some work for the day shift while the others for the night shift. Nevertheless, it is reasonable to assume that there are around 18,000 players there.
7. According to the government, there were 9000 licence holders as of March 2017. Three-fourth of them hold one licence while less than 2% of licence holders hold more than 10 licences. (Footnote 40, Public Transport Strategy Study)
8. Taxi fares in New York (http://www.nyc.gov/html/tlc/html/passenger/taxicab_rate.shtml), London (https://tfl.gov.uk/modes/taxis-and-minicabs/taxi-fares), and Bristol (https://www.bristol.gov.uk/streets-travel/taxi-fares-in-bristol)