Should Governments Regulate Platform Competition?
São Paulo’s administration would say “yes!”
In the last years, the emergence of Transportation Network Companies shed light on the regulation framework of private transport in several cities. Companies that offer peer-to-peer services, such as Lyft, Uber, Didi and Cabify, have brought a model of sharing economy that is positioned in a grey area of regulation. Whereas taxis around the world tend to be heavily regulated by law or decrees, with a maximum fee established and the need for special licenses, platforms have several specificities that make regulation far more complex.
In the last year, São Paulo City Hall regulated the activity by charging a flexible mileage fee. This mechanism allowed public authorities to control the flow of vehicles in public roadways according to public interest. By applying simple demand and supply economics theory, the Municipal Committee for Road Use could leverage the price charged per km in peak-hours to reduce the demand for the service, as well as reduce the price for adapted vehicles, improving the availability of service for disabled people. Price variance would be based on a task of 27,150,000 km travelled/month, correspondent to the amount traveled by 5,000 taxis in the same period. Such model was able to incorporate the flexibility needed to regulate the emerging service while reducing conflicts with other transport service providers, such as taxi unions. Furthermore, it has brought juridical stability, enabling four companies to enter the market: 99, Cabify, Easy and Uber.
A couple months after the regulation took place, City Hall officers realized the travels were becoming numerous and concentrated in one company: Uber had more than 90% of market share.
Indeed, the model was designed to allow a flexible control of aggregate demand, but it could not prevent a monopoly: in this case, increasing the price could become a heavy burden for small companies, while the monopolist could easily afford the new price without even reducing its operation. In this case, the rise of price would reinforce the monopoly without effectively reducing the externalities caused.
But why should the City Hall regulate competition among transportation platforms? Could the market achieve balance itself or was there a need for public intervention? Some features show that there was a market failure and therefore regulation could be necessary.
Crossed network effect makes Uber, the dominant platform, more attractive for both customers and drivers. It attracts customers because of the reduced waiting time and service reliability, and drivers because of the number of clients and profitability. Even if the platform was able to tackle an existing asymmetry of information in the taxi market, it created a new structural market failure that limits competition among platforms.
Additionally, small platforms face several barriers to entry the market. Due to “winner takes it all” effect, Uber had a 2-year advantage over small platforms. To compete with a consolidated company, small platforms needed huge investments to attract customers and drivers, reaching a critical size.
Last but not least, transportation is an essential service to any city, and ensuring competition is crucial to guarantee the service is affordable and reliable. Moreover, these services have to be integrated into city’s daily commute, filling public transportation gaps and contributing to long-term innovation. Even in the absence of abuse of dominant position, regulating structural market failure is essential to prevent monopolies to harm public interest in the future.
In order to reduce the platform’s monopoly, the solution was a progression in price according to kilometers travelled. The new mechanism consisted of raising the mileage-fee according to the consumption of the company, based on bands of the global task of 27,150,000 km: if one of the operators had consumed the equivalent to 45% of the task, the first 20% would be charged the normal price of 0,10 cents per km, but the following 20,01% to 40% would undergo an increase of 10%, while the remaining 5% would experience a 30% increase. If a company had exceeded the task, it would be charged 300% for the additional kilometers traveled. The higher price, then, would reallocate demand among platforms.
Despite the claims about inefficiency and government meddling, monopolies in transportation can harm long-term provision and affordability of an essential service, and reduce incentives to innovation. Uber’s sharing economy broke the monopoly of taxi companies and has brought several benefits since. From now on, the challenge is to prevent the emergence of new monopolies and make sure not to repeat the same old story.