Federal appeals court rules against Chicago taxi monopoly in favor of consumers, competition, creative destruction
In a devastating legal blow to Big Taxi, the United States Court of Appeals for the 7th Circuit in Chicago has ruled that Uber and taxis are not the same type of transportation service, and cities like Chicago can therefore regulate each of them differently, see a review of the decision here. Here are some excerpts from the actual decision written by Judge Richard Posner for the three-judge majority, which demonstrate his economic expertise and explain why his 1973 book “Economic Analysis of Law” is now in its 7th edition:
Here he invokes the important economic concept of “Schumpeterian creative destruction” (emphasis mine):
A license to operate a coffee shop doesn’t authorize the licensee to enjoin a tea shop from opening. When property consists of a license to operate in a market in a particular way, it does not carry with it a right to be free from competition in that market. A patent confers an exclusive right to make and sell the patented product, but no right to prevent a competitor from inventing a non-infringing substitute product that erodes the patentee’s profits. Indeed when new technologies, or new business methods, appear, a common result is the decline or even disappearance of the old. Were the old deemed to have a constitutional right to preclude the entry of the new into the markets of the old, economic progress might grind to a halt. Instead of taxis we might have horse and buggies; instead of the telephone, the telegraph; instead of computers, slide rules. Obsolescence would equal entitlement.
Here Posner dismisses the attempt by Big Taxi to be protected from competition from ride-hailing rivals using government force:
Taxi medallions authorize the owners to own and operate taxis, not to exclude competing transportation services. Taxi companies in this case cannot exclude competition from buses or trains or bicycles or liveries or chartered sightseeing vehicles or jitney buses or walking; indeed they cannot exclude competition from taxicab newcomers, for the City has reserved the right to issue additional taxi medallions. Why then should taxi companies be allowed to exclude competition from Uber? To this question they offer no answer. All that the City gives taxi‐medallion owners is the right to operate taxicabs in Chicago. That isn’t a right to exclude competitive providers of transportation.
The plaintiffs continue to receive some insulation from competition, because they alone are permitted to operate taxicabs in Chicago. Taxicabs are preferred to Uber and other ride-hailing services by many riders, because you don’t have to use an app to summon them — you just wave at one that drives toward you on the street — and also because the fares are fixed by the City.
Here Posner rejects Big Taxi’s claim that Chicago should subject ride-hailing services to the exact same regulations as taxis:
Taxi companies argue that the Chicago has discriminated against them by failing to subject Uber and the other ride-hailing apps to the same rules about licensing and fares (remember that taxi fares are set by the City) that the taxi ordinance subjects the plaintiffs to. That is an anti-competitive argument. Its premise is that every new entrant into a market should be forced to comply with every regulation applicable to incumbents in the market with whom the new entrant will be competing.
Here’s an analogy: Most cities and towns require dogs but not cats to be licensed. There are differences between the animals. Dogs on average are bigger, stronger, and more aggressive than cats, are feared by more people, can give people serious bites, and make a lot of noise outdoors, barking and howling. Feral cats generally are innocuous, and many pet cats are confined indoors. Dog owners, other than those who own cats as well, would like cats to have to be licensed, but do not argue that the failure of government to require that the “competing” animal be licensed deprives the dog owners of a constitutionally protected property right, or alternatively that it subjects them to unconstitutional discrimination. The plaintiffs in the present case have no stronger argument for requiring that Uber be subjected to the same licensure scheme as the taxi owners.
Just as some people prefer cats to dogs, some people prefer Uber to Yellow Cab, Flash Cab, Checker Cab, etc. They prefer one business model to another. The City wants to encourage this competition, rather than stifle it as urged by the plaintiffs, who are taxi owners. So there is no merit to the plaintiffs’ claim that the City has taken property from them without compensation.
Finally, some words from Judge Posner about the “big picture” of competition, deregulation and legacy taxi monopolies:
Beginning in the 1970s a deregulation movement swept the country, powered by the belief that competition is often a superior alternative to regulation. Entire agencies vanished, such as the Civil Aeronautics Board, which had greatly limited competition in the airline industry. Many cities loosened the regulatory limitations on taxi services — and this well before there were any ride-hailing services. The deregulation movement has surged with the advent of the ride-hailing services.Chicago has chosen the side of deregulation, and thus of competition, over preserving the traditional taxicab monopolies. That is a legally permissible choice.
MP: Probably an appropriate time to close here by invoking Perry’s Law: “Competition breeds competence.” And there’s sure a significantly greater level of competence in the transportation industry today than ever before in history, thanks to ride-hailing services like Uber and Lyft that provide a much-needed alternative to Big Taxi by offering much better service at a lower price. Kudos to Judge Posner and his fellow justices for promoting market competition and Schumpeterian creative destruction by helping to legally erode the anti-competitive power of the traditional taxicab monopoly in Chicago.
First published on AEIdeas on October 11, 2016.