THE BLOG

Cracking the Travel and Hospitality Industry Cartel

10/20/2014 06:01 EDT | Updated 12/20/2014 05:59 EST
Reuters

In many Canadian cities, if you try to catch a cab in the dead of winter, after a hockey game, early in the morning after exiting a club, or at peak holiday times, good luck. Most Canadian cities of significant size have regulations that limit the number of taxis. That creates an artificial shortage and plenty of shivering Canadians on sidewalks from coast to coast.

City regulations for the taxicab industry are often justified as an attempt to protect consumers. So taxicabs are regulated for mechanical safety, and drivers are regulated to ensure basic competence.

Basic regulation makes sense. But regulations often proliferate to unnecessary extremes, helped along by special interests that want less competition. This is especially evident with regulations that touch on supply.

In 1971, Nobel Prize winning economist Joseph Stigler noted the tendency of businesses to try and use regulation to thwart would-be competitors. In a now-famous essay The Theory of Economic Regulation, Stigler wrote of how the political process allowed relatively small groups to "capture" the regulatory agencies overseeing their industries. They do so in order to secure favourable treatment. Think of taxicab company owners as just one example.

The effect of this regulation reality is obvious once again with Uber's entry into the city transportation market, and with predictable opposition from taxi cartels.

Uber, for those who missed it, is a ride-sharing service that began in San Francisco in 2009 but is now worldwide. The service allows smartphone users to connect with drivers who could offer them a ride for a fee based on distance and time travelled.

One business website compared 21 American cities and found that for a five-mile trip at 30 miles per hour (eight kilometres travelled at 48 kilometres per hour), in 19 of 21 cities, Uber was a better deal. Only in New York City and Philadelphia were cabs marginally cheaper than an Uber ride. And even those cities lost the advantage once a 20 per cent tip was factored in.

One example: Los Angeles, where the five-mile ride would cost $9.40 (U.S.) with Uber but $16.35 for a taxicab (and $19.62 with tip).

Regulations affect more than just the taxi sector. A new service, also pioneered in San Francisco, Airbnb, connects travellers to homeowners and others who wish to rent out all or part of their own accommodation.

Other services such as vacation rental websites have long offered niche products. Bed and Breakfast establishments also provide unique lodging for travellers. Airbnb seems to have cracked open the market for more business-oriented or budget-conscious travellers who are okay with less privacy.

Predictably, vested interests have opposed these services. The taxicab cartels in multiple cities have lined up against Uber. Some in the hotel industry have demanded cities regulate Airbnb and some governments have responded. New York Attorney General Eric Schneiderman just released a report claiming nearly three-quarters of Airbnb's rentals are "illegal"--e.g., they don't abide by every regulation for city hotels, or really are hotel operations in disguise.

A case can be made that multiple room, commercial lodging should be treated in equivalent terms but the New York experience highlights the need for niche services provided by residents. For example, the New York report complains that the "benefits" of such residential renting are unevenly spread--most listings are in Manhattan and not the other boroughs.

Hello. Manhattan, and not the Bronx, is where most tourists care to go to when they visit New York City. And Manhattan is expensive both for residents and for tourists. So a New Yorker rents out her living room couch for a week to help pay her exorbitant monthly rent; a tourist likes the rate because it presumably beats local hotels; it's a win-win situation for everyone--everyone except established businesses.

Vancouver, Toronto, Ottawa and especially Calgary (hotel-wise, because of the energy boom), are also expensive cities in which to live and visit. So the Airbnb resident-friendly, tourist-friendly approach is just as relevant in Canada.

Stigler was right. Insofar as selected regulations exist to prevent competition, better service and lower prices for consumers, it means some city rules on taxicabs exist for the benefit of the taxi cartels; it means some hotel regulations exist to help the large hotel chains.

But that doesn't mean the public must endure government-approved cartels and the anti-consumer, supply-constricting, price-fixing that results. If the success of Uber and Airbnb is any indication, enough consumers vote with their wallet to make this point: Pro-industry regulation should be a thing of the past.

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