The need for regulatory restrictions on number of taxi licenses an economic analysis. Produced for The Norwegian Taxi Association

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1 The need for regulatory restrictions on number of taxi licenses an economic analysis Produced for The Norwegian Taxi Association

2 About Oslo Economics Oslo Economics provides economic analysis and strategic advice to businesses, policymakers and organizations. Our analysis may serve as a foundation for political decision making, informational basis for legal proceedings, or an information base to NGOs who aim to affect the framework conditions they are governed by. We understand the interception between policy and market. Oslo Economics represents a consulting environment in economics, consisting of highly qualified consultants with experience from public management, consultancies and various analytical and research environments. We provide insight and analysis based on industry experience, strong expertise and an extensive network of partners and business relations. Economic analysis Oslo Economics provides economic analysis to policymakers, organizations and businesses. We are competent in conducting economic analysis according to the guidelines given by the Ministry of Finance. Through our work with economic and other types of analysis, we are experienced in identifying and assessing the effects of different proposals. We calculate costs and benefits, and qualitatively assess effects if calculation is not possible. The need for regulatory restrictions on number of taxi licenses an economic analysis/oe report Oslo Economics, May 29 th 2017 Contact person: Ove Skaug Halsos / Responsible partner osh@osloeconomics.no, Tel

3 Table of Contents Executive summary 4 1. About the assignment 8 2. Regulation of the taxi market through licensing scheme About the licensing scheme Proposed changes in the licensing scheme Characteristics of the taxi market and the need for regulation An overview of the taxi market in Norway The taxi market consists of several sub-markets Variations and differences in demand justifies limitations on number of taxi licenses The taxi market is characterized by several types of market failure International experiences substantiate concerns about deregulation What will happen if the licensing scheme that limits the number of taxi licenses is repealed? Repealing the limitation on the number of taxi licenses will lead to a need for changes in other regulations A deregulation will lead to considerable changes in the markets Other effects Summary of effects and implications regarding need for regulation 26 Appendix 1: The taxi market in other countries 28 Sweden 28 Denmark 29 The Netherlands 30 Appendix 2: Elaboration of the assumption that removal of the limitation of the number of licenses will imply that the service obligation will be repealed 32 References 34

4 Executive summary On behalf of the Norwegian Taxi Association (Norges Taxiforbund), Oslo Economics has examined the socioeconomic considerations underlying the current taxi licensing scheme. In the current scheme licenses are awarded based on a consideration of the need for taxis in specific areas. This means that there is a numerical limitation of taxi licenses in different regions. EFTA Surveillance Authority (the Authority) has delivered a reasoned opinion concerning certain provisions of Norwegian law governing access of transport operators to the market for taxi services, finding that they are not in compliance with the EEA Agreement. The Authority inter alia finds that the licensing scheme which limits the number of taxi licenses constitutes a restriction on the freedom of establishment that has not been sufficiently justified by the Norwegian Government, and that the conditions for granting new licenses are not objective, non-discriminatory, and known in advance. The theme of this report is related to the rationale for limiting the number of licenses. In a separate report, we consider methodologies for awarding taxi licenses based on socioeconomic principles and recommend a model that can be used by counties to determine the number of licenses needed. The taxi industry fills an important function in the overall supply of transport services in Norway. Taxi services can be tailored to the specific needs of the individual customer and are available at times and places that are not served by other forms of transport services. The taxi industry also supplies important services relating to the transportation of schoolchildren, patients, the disabled and the elderly, for example through a scheme providing transport-services for the disabled ( TT-ordningen ) and through contracts for school- and patient transport respectively. It is therefore of public interest to ensure a satisfactory supply of taxi services throughout the country. This also means that a sufficient level of taxi services should be available at all times and at a reasonable price. When wanting to ensure the availability of taxi services, there are some important characteristics of the taxi market that warrant a need for regulation. Firstly, the demand for taxi services varies greatly between different areas and over hours of the day. In addition to this, the taxi market also displays several different types of market failure. Information asymmetries, economies of scale, network effects, switching costs and externalities are all examples of market failures that, in the absence of regulations, might lead the taxi market not to provide an economic optimal level of services to customers. Market failures and description of their effects on different segments of the market are presented in figure 1 below. The need for regulatory restrictions on number of taxi licenses an economic analysis 4

5 Figure 1-1: Market failures in the taxi market Market Failure Description Impact Affected markets Asymmetric information Information about price and quality can be difficult to attain for customers Low price elasticity of demand and less fierce competition between providers- increased price and/or reduced quality Single trip market, especially the hailing segment. Economies of scale Two sided markets and network effects Externalities Cost advantages for dispatchers with many license holders More license holders connected to a dispatcher attracts customers (expectations of higher availability) and more customers attracts more license holders (expectation of increased revenues) Effects that will not be considered by the market players i.e. effects on environment and congestion Few or only one dispatch central Increased risk for market power abuse increased price and/or reduced quality Same as economies of scale Supply of services above Socioeconomic optimum Market for dispatch centrals. Both in markets for single trips (telephone booking, taxi ranks and hailing segments) and contract trips Same as economies of scale Market for single trips Exchange costs Source: Oslo Economics Taxi rank systems and uncertainty with regards to waiting time for next available car leads to significant exchange costs for customers Low price elasticity of demand and less fierce competition between providers- increased price and/or reduced quality Taxi ranks and hailing segments When considering factors like geography and time as well as the different ways of acquiring taxi services, the taxi market can be divided into several different market segments. Each segment has different characteristics, both when it comes to demand, and when it comes to the presence of market failure. In market segments with high demand, the income potential for the license holders are large, while in segments with a more modest demand for taxi services, the income potential is smaller. By regulating the market one aims to ensure a sufficient supply of taxi services in all market segments. In the current system, the availability of taxi services is secured through a scheme which awards new licenses based on an assessment of the need for licenses and which includes a service obligation. The service obligation imposes an obligation on the licensee to be available and to provide taxi services in all market segments within the relevant district. The limitation on the number of licenses available in turn provides the licensee with a certain degree of protection from competition, and thus, in practice, with an opportunity to cross-subsidize any unprofitable trips with the profits from trips in the more attractive market segments. If the limitation on the number of available licenses should be removed, we find it unlikely that the service obligation in place today could be upheld. In general, it is difficult to impose obligations on private actors to provide services that are commercially not profitable without providing them with some form of compensation. Thus, it would be necessary to introduce some form of compensation to maintain the service obligation, or any corresponding form of obligation, in a regime where the number of licenses is not limited. The need for regulatory restrictions on number of taxi licenses an economic analysis 5

6 Price per km with passenger (kr/km) Repealing the current needs-based system, and thereby also the service obligation, will affect different market segments differently. The supply of taxi services is likely to increase in attractive market segments where the demand is high, while it s likely to decrease, and might disappear, in segments where the income potential is low. Large variations in demand between areas and over time, indicate that there will be areas and/or time periods where taxi services will be reduced or obsoleted should the market be deregulated. This could for instance be large and sparsely populated areas, but also suburban areas closer to more attractive markets, and certain time periods, both in rural and urban areas. It is difficult to predict whether a removal of the numerical limitation of taxi licenses will lead to an increase or a decrease in overall prices. Prices are most likely to increase in segments where supply falls. In segments where supply is expected to increase, the effect is uncertain. The increase in competition suggests lower prices, while increase in costs due to the increased number of vehicles and decrease in the utilization of capacity suggests higher prices. Whether cost increases can be transferred to customers or not depends on the presence of market failures. In segments where demand is low, or where different types of market failure significantly inhibits price competition, there is a risk that prices will increase. This concern is also backed by Figure 1-2 below that shows the correlation between density of taxi licenses in different Norwegian counties and prices charged per km with passengers. We stress that there can be many reasons for this correlation, and one should not interpret the figure as showing a causal relationship between number of license and prices. Nevertheless, it illustrates that the Norwegian taxi market is complex and that, due to market failures, one should not necessarily expect prices to decrease when the number of licenses increase. Figure 1-2: Correlation between density of taxi licenses and prices charged per km with passengers Taxi licenses per residents Source: Oslo Economics Any price increases that are deemed unreasonable may also be counteracted by applying maximum fares. However, such price regulations might also cause the supply of taxi services to disappear in more market segments because they reduce the income potential of the license holders. Removing the numerical limitation on taxi licenses may also have other effects. The increased supply in attractive market segments might lead to an increase in emissions, as well as to increases in traffic and congestions in cities and towns. Furthermore, increased costs for license holders might lead to reductions in quality of services provided. The analysis of the taxi market shows that the current needs-based licensing scheme plays an important role when it comes to fulfilling the objective of having taxi services available in the whole country. If the numerical limitation on licenses is removed, it might be necessary to introduce an alternative compensation mechanism or The need for regulatory restrictions on number of taxi licenses an economic analysis 6

7 regulation to ensure a satisfactory supply of taxi services in market segments that are less commercially profitable. The need for regulatory restrictions on number of taxi licenses an economic analysis 7

8 1. About the assignment On behalf of the Norwegian Taxi Association (Norges Taxiforbund), Oslo Economics has examined the socioeconomic considerations underlying the current taxi licensing scheme. In the current scheme licenses are awarded based on a consideration of the need for taxis in specific areas. This means that there is a limitation on number of taxi licenses in different regions. The background for this report is that the EFTA Surveillance Authority (the Authority) has delivered a reasoned opinion concerning certain provisions of Norwegian law governing access of transport operators to the market for taxi services, finding that they are not in compliance with the EEA Agreement. The Authority inter alia finds that the licensing scheme which limits the number of taxi licenses constitutes a restriction on the freedom of establishment that has not been sufficiently justified by the Norwegian Government, and that the conditions for granting new licenses are not objective, non-discriminatory, and known in advance. The theme of this report is related to the rationale for limiting the number of licenses. The report is built up in the following way: In chapter 2 we describe the market for taxi-services in Norway, and some important regulations. In chapter 3 we describe important characteristics of the market that justifies regulation, and summarize international experiences with deregulation of taxi services. In chapter 4 we analyze the effects of removing the limitation on number of taxi licenses in Norway. Appendix 1 contains a more detailed summary of the experiences from deregulation in Sweden, Denmark, Netherlands and Ireland. In appendix 2 we present the reasoning behind the assumption that removal of the limitation on number of taxi licenses also will lead to removal of the service obligation. The need for regulatory restrictions on number of taxi licenses an economic analysis 8

9 2. Regulation of the taxi market through licensing scheme The taxi industry fills an important function in the overall supply of transport services in Norway. Compared to ordinary transport services, taxi services are more flexible since the supply can be tailored to the specific needs of the individual customer (Konkurransetilsynet, 2015). The customer decides when and where to depart, as well as the destination of each ride. The supply of taxis should also be available at times and places where no other transport services exists. The taxi industry therefore fulfils a need that is not being filled by other forms of transport services as public transportation. The taxi industry also supplies important services relating to the transportation of schoolchildren, patients, the disabled and the elderly, for example through a scheme providing transport-services for the disabled ( TTordningen ) and through contracts for school- and patient transport respectively. To ensure a satisfactory supply of taxi services throughout the country, that is available at all times, the supply of taxis is limited through a licensing scheme where licenses are awarded based on considerations of the need for taxis in specific areas. 2.1 About the licensing scheme The licensing scheme is regulated by the Ministry of Transport and Communication through the Norwegian Act on Professional Transport of 21 June 2002 no. 45 ( Professional Transport Act ) 1 and associated regulations, especially Regulation 401/2003 ( The Professional Transport regulation ). 2 The county councils manage the licensing scheme and determine licensing areas, the number of licenses, as well as more detailed regulations Assessment of need for taxi licences In the current scheme licenses, the county council awards licenses based on a consideration of the need for taxis in specific areas. This limits the possibility to enter the market. In the Official Norwegian Report «NOU 1974:44 Målsettinger og virkemidler i samferdselspolitikken» (Objectives and instruments for the transport policy) the reasoning for the licensing scheme is according to (TØI, 2010) explained in the following way (translated from Norwegian): «In the taxi market it may be necessary to give the suppliers some sort of protection, to, in return set terms that there shall be possibilities for taxi-transportation in areas and at hours that would otherwise not be sufficiently served. This implies that one should maintain a certain limitation of the supply, to prevent more random transport suppliers from eliminating the profitpossibilities in good areas for traffic.». Through the licensing scheme, the licensees are given an exclusive right to operate taxis within a given district. In return the licensees are committed to deliver taxi services at the times the authorities decides. The regulation is meant to ensure a necessary supply for the customers, in addition to give the licensees a sufficient income such that the supply can be maintained The management of the licensing scheme According to the Professional Transport Act, a taxi license is necessary to be allowed to supply taxi services. A taxi license implies both a right and a duty to offer taxi services. The design and the terms for the current scheme for awarding licenses are, in general, regulated by the Professional Transport Regulation. Within the frames of the Professional Transport Act and associated regulations, the licensing scheme is managed by the different county councils. This means that there will be variations between different licensing areas. As an example Oslo has made their own regulations for approval and operation of central dispatchers and licenses in Oslo municipality 3. The county council determines the number of licenses in each licensing area. Each taxi-license is connected to a single taxi. In addition, the county council can issue reserve-licenses to existing license holders. The reserve licenses shall, amongst other, contribute to cover hours with high demand. (TØI, 2010). Unless the county councii decides otherwise, each municipality will constitute a licensing area. The County councils have however developed a practice where 1 «Lov av 21. juni 2002 nr. 45 om yrkestransport med motorvogn og fartøy (yrkestransportlova)» 2 Forskrift av 26. mars 2003 nr. 401 om yrkestransport med motorvogn og fartøy (yrkestransportforskriften)» 3 «Forskrift av 15. mai 2013 nr. 490 om godkjenning og drift av drosjesentraler og drosjeløyver i Oslo kommune (drosjeforskriften, Oslo)» The need for regulatory restrictions on number of taxi licenses an economic analysis 9

10 license areas are expanded to be valid in the whole county. According to the Norwegian Competition Authority (2015) each county in practice constitutes licensing area. Oslo and Akershus separates from the other counties by constituting a common licensing and service area even though they manage their own separate licensing schemes. The county council also determines operating locations for the different license holders. The services shall be provided in connection to this location. This can for instance be a specific municipality. The purpose of this, according to the competition authority (2015), is to ensure that the whole county will be provided their need for transportation. Nevertheless, the license holders can still provide trips to all places within or outside the licensing area. The access to start trips outside their own licensing area is however restricted. The county councils can decide whether there shall be one or more dispatch centrals in a district and determine rules for the operation and organization of the central. The main task for a dispatch central is to connect the customers with the taxi drivers and dispatch trips (TØI, 2010). The central administrates and dispatches trips, organizes shifts and reserves to ensure efficient use of the taxis and a sufficient supply of taxis all hours of the day. In areas where there is no regulation of maximum price, the centrals also determine tariff levels. The county council can decide that license holders must be connected to a dispatch central, and also where a license holder shall be stationed. From the department of transportations public hearing on changes in the Professional Transport Act (2016) one can read that all county councils in practice demands connection to a central dispatcher when such exists. When demand for services are so low that the establishment of a central dispatcher cannot be justified, the county council issues residence-based licenses (bopelsløyve) instead. The duty to provide taxi-services imply that the license holder must operate and supply services from the taxivehicle at the hours set by the licensing authorities. This duty is meant to ensure supply of services also in periods of low demand, and as a main rule the license holder must be available for service 24 hours a day (ECON Analyse, 2005). For licenses connected to a dispatch central this is somewhat different. Here the central coordinates work-shifts and reserve-licences to cover the duty to supply services. For residence-license holders that are not connected to a central 4 Forskrift av 30. september 2010 nr om takstberegning og maksimalpriser for løyvepliktige drosjetransport (forskrift om takstberegning og maksimalpriser) (bopelsløyver) the license holder must in principle be available at all hours. License holders can, as a main principle, not hold another main occupation or full-time job. The license holder can however employ other drivers. The general requirement for being applicable to hold a license is that one runs a steady and long-lasting business in Norway, and that one has a good repute, satisfactory economic abilities, and sufficient professional competence. When licenses are made available due to cease of business or for instance death of a license holder, applicants with at least two years experience as fulltime taxi-driver are given preference to take over. When more applicants are qualified, the most experienced applicant is awarded the license. If no applicant has preference in form of seniority the licensing authorities in each licensing-district decides on which conditions the allotment should be carried out. According to the Norwegian Competition Authority (2015) licenses are in practice always given to physical persons, mostly registered as sole proprietorships. Only a handful of license-holders own several licenses. For physical persons, the license is withdrawn when the person turns 70 years old Maximum Price Regulation Taxi fares are disciplined through legal regulations on calculation of fares and maximum prices 4 determined by the Competition Authority. According to the regulation one should use a parallelfare system. Parallel-fares means calculations of price based on simultaneous use of both time and distance fares during the whole trip. 5 Instead of parallel fares one can also use a predetermined set price for a given route. 6 In areas affected by the maximum price regulation the Competition Authority determine maximum prices for both time and distance fares, and maximum prices for surcharges. The regulation only regulates maximum prices, and taxi drivers are free to charge fares below these maximum prices. Normally the Competition Authority will adjust maximum prices once a year (Konkurransetilsynet, 2015) Since the year 2000 the Competition Authority has exempted several areas from the maximum price regulation. (Konkurransetilsynet, 2015). These are areas where it is assumed to be sufficient competition between both taxis and central dispatchers. The 5 Forskrift om takstberegning og maksimalpriser 2. 6 Forskrift om takstberegning og maksimalpriser 3. The need for regulatory restrictions on number of taxi licenses an economic analysis 10

11 criteria for exception from the regulation is that there are two or more central dispatchers in the area, and that other characteristics of the area encourage competition. In areas exempted from the price regulation, taxis can freely set their prices. From the regulation of calculation of fares and the maximum price regulation it follows that the following areas are exempted from the maximum price regulation: Oslo, Akershus, Drammen, Lier, Nedre Eiker, Røyken, Hurum, Kongsberg, Øvre Eiker, Modum, Trondheim, Bergen, Askøy, Fjell, Sund, Stavanger, Randaberg, Sola, Sandnes, Kristiansand, Søgne, Songdalen, Vennesla, Moss, Rygge, Råde, Fredrikstad, Sarpsborg, Haugesund og Karmøy. The maximum price regulation also doesn t apply for transportation with more than four passengers in the vehicle. In the map below we show which areas that are exempted from the regulation. Figure 2-1 Map over areas exempted from the maximum price regulation NOU 2017: 4 -Delingsøkonomien muligheter og utfordringer which can be translated to: the Sharing Economy opportunities and challenges Proposal to changes in The Professional Transport Act On December 9th 2016 the Ministry of transportation sent a proposal to changes in the Professional Transport Act to public hearing. The deadline for comments were set to march 1 st 2017 (Samferdselsdepartementet, 2016). The proposed changes are mainly connected to regulation of the taxi market, and part of a greater work to reform regulations. The Ministry has signaled that it will follow up on the proposed changes with a new hearing on proposed changes in regulation. The main part of the proposal is to better facilitate possibilities for carpooling without license. Furthermore, the Ministry suggests to raise the upper age limit for holding a taxi-license from 70 to 75 years. At last the Ministry suggests to change the Act so that it will no longer be possible for county councils to demand that license holders must be connected to a central dispatcher, or to regulate central dispatchers in the licensing area The Sharing Economy Committee In NOU 2017: 4 Delingsøkonomien muligheter og utfordringer The sharing economy committee considered, amongst others, the taxi market to be one of the markets where the sharing economy is especially relevant. The committee has made recommendations for changes in the regulation of the taxi market. The majority of the committee recommends that the barriers to entry in the taxi market should be reduced to open up for new actors. The majority therefore recommends that the limitation on number of licenses should be repealed. This means that also the needbased assessment of licenses, and duty to provide services will be extinguished. Source: Oslo Economics 2.2 Proposed changes in the licensing scheme The current licensing scheme is under debate and ongoing processes could lead to changes in the regulation. In addition to ESA s statement that forms the starting point for this report, proposal to changes in the Professional Transport Act are on public hearing and the taxi market has also been given significant attention in the Official Norwegian report: The majority believes that competition will be improved if new types of business models are allowed to enter the marke. At the same time they acknowledge that reduced barriers to entry may not be sufficient to establish well-functioning competition on prices. The majority does not want to continue the maximum price regulation, but suggests that it in the telephone and booking market should be obligatory to give information about prices in advance. Further measures is recommended to be considered if the competition proves to be not sufficiently fierce. For instance. maximum price regulation, new fare systems or creating a price portal. The need for regulatory restrictions on number of taxi licenses an economic analysis 11

12 The majority also points to the fact that removal of the obligation to supply services could decrease the supply in less densely populated areas, but believes that the effect is not unambiguous. Removal of barriers to entry will make it easier to carry out taxi-like transportation, preferably in combination with other businesses. The majority means that targeted measures could be taken if the supply in rural districts should be weakened. The minority of the committee believes that the taxi industry should be treated as part of the country s public transportation infrastructure, and safeguard the need for personal transportation in areas and hours where it is not commercially profitable to do so. The supply of services should, as far as possible, be based on full time occupations and be the main occupation of the driver. The minority also points to the importance of maintaining working conditions for the employees in the industry. The need for regulatory restrictions on number of taxi licenses an economic analysis 12

13 3. Characteristics of the taxi market and the need for regulation In this chapter, we describe important characteristics of the taxi market. We start by giving an overview of the taxi market in general, before we explain different segments of the market. In addition we present market failures existing in the market. Based on this, we argue why there is a need to regulate the market through a limitation on number of taxi licenses. We also look at international experiences of deregulation of the taxi market, with a focus on the experiences from Sweden, Netherlands and Ireland. 3.1 An overview of the taxi market in Norway According to Statistics Norway, there was in total taxi licenses in Norway in The total turnover in the taxi industry this year was approximately 8.1 billion Norwegian kroner, and around 32.2 million trips were produced. Table 3-1 provides an overview of the taxi market in the different counties. The table shows the number of licenses per county, in addition to different measures on the taxi density related to population and area. The table also pictures the total number of kilometres driven in the industry in the different counties, as well as the share of the distance travelled with passengers. Finally, the table illustrates price per kilometre with passengers. Table 3-1: Overview of taxi markets in different counties (2015) Licences in total Licenses per Residents per license residents Licenses pr km² Total km driven in industry (1000 km) Share traveled with passengers (percent) Price per km with passenger (kr/km) Østfold ,5 27 Akershus ,5 28 Oslo ,8 35 Hedmark ,5 23 Oppland ,7 27 Buskerud ,3 27 Vestfold ,9 26 Telemark ,3 24 Aust-Agder ,7 26 Vest-Agder ,7 33 Rogaland ,9 31 Hordaland ,5 28 Sogn og Fjordane ,7 34 Møre og Romsdal ,6 30 Sør-Trøndelag Nord-Trøndelag ,1 26 Nordland ,6 28 Troms ,1 28 Finnmark Source: Statistics Norway. As seen, there exists considerable variations between the counties. There are, for example, differences with respect to the density of taxis per resident and price per kilometre with passengers. The table also The need for regulatory restrictions on number of taxi licenses an economic analysis 13

14 Price per km with passenger (kr/km) demonstrate that, although this can be explained by several factors, areas without price- regulation are not necessarily in the lower price range.. This applies for Oslo and Akershus, in addition to counties where the largest cities are excepted from price regulation; Vest-Agder, Hordaland, Rogaland and Sør-Trøndelag. Unlike what one would expect, the lowest prices do not necessarily occur in counties where the taxi density is high. The relationship between the number of licenses per resident in a county and prices charged per kilometre with passengers are shown in Figure 3-1. The figure illustrates that there is a positive correlation between density of taxi licenses and prices charged per kilometre with passengers. 7 This relationship can have several explanations. One could be that the maximum price regulation exists in many of the different areas. Regardless of this, it does however provide an interesting background for the problems discussed in this report. Figure 3-1: Correlation between density of taxi licenses and prices charged per km with passengers Taxi licenses per residents Source: Statistics Norway 3.2 The taxi market consists of several sub-markets The taxi market consists of several sub-markets, with relatively different characteristics on the supply and demand side of the market. Services offered in the taxi market are also differentiated as illustrated in Table 3-2 Mainly, one can distinguish between: 1. The contract market Services based on contracts with large customers, where the contracts have been signed after negotiations or procurements 2. The single trip market services based on the order of a single trip The contract market can further be divided into several different products transportation of schoolchildren, patients and the so-called TT-service ( TT-ordningen ). In procurements of such services, the suppliers of taxi services often compete against other transport suppliers, such as as transportation by bus and tour buses. The single trip market can also be differentiated depending on the way the taxi is being ordered: 1. Telephone booking directly or through dispatch centrals 2. The spot market: a. Taxi rank b. Hailing on the street 7 Oslo separate themselves by having the largest amount of licenses and the highest prices in the country. However, even if Oslo is excluded, the trendline showing the correlation between density ogf taxis and prices is still positive. The need for regulatory restrictions on number of taxi licenses an economic analysis 14

15 Figure 3-2 The taxi market consists of a variety of submarkets offering differentiated products Source: TØI (2010)/Oslo Economics. The figure illustrates different products offered in the taxi market. The demand after different products will vary over time, depending on the time of the day, week and season, illustrated in Figure 3-3. The figure shows how number of trips in Hamar, and three different subareas in Oslo, varies over different hours of the day and the week. The figures for Oslo are based on numbers from Oslo Taxi only, which implies that the real number of rides are considerably higher than what is showed in the figure. The figure provides a picture on how the demand for taxi services varies over time. We can see that the demand is at its highest in rush hours Monday to Friday, and at night hours during the weekend. In Hamar we find the largest demand from 7 am 8 am from Monday to Friday, in addition to 1 pm 3 pm, and at 0 am 2 am on Sunday. Total demand for the country as a whole will vary between different areas of the country, and depend on geographical and demographical factors. For example, demand for taxi services in cities, where the population is large, will typically be high compared to areas that are more sparsely populated. In addition, market conditions will vary between areas of the country depending on availability of alternative transportation services, as well as when these services are available. Regulation of maximum prices will also have an impact where this has been introduced. The need for regulatory restrictions on number of taxi licenses an economic analysis 15

16 Figure 3-3 Demand for taxi services vary over time Source: Oslo Economics base on data from fra Hedmark Taxi and Oslo Taxi. The figures illustrate how demand varies over time. The figur eon the top left shows number of trips with passenger in Hamar through every hour of the first week in march The other figures shows average number of trips per hour per week in march 2017 conducted by taxis connected to Oslo Taxi (central dispatcher) in three different areas of Oslo. The Norwegian taxi market therefore consists of different segments which together constitutes several sub-markets. This implies that it is difficult to say something about the effect of a change in the regulatory framework, since the effects can vary between the different sub-markets. 3.3 Variations and differences in demand justifies limitations on number of taxi licenses From a societal perspective, it is desirable to ensure a sufficient supply of taxi services in all market segments. This implies that a customer should be able to order a taxi at most times and places. In addition, the services should be offered at a reasonable price. The current licensing scheme is an attempt to regulate the market so that the society s need for taxi services is being covered. The background for the scheme is a wish to guarantee satisfactory supply of taxi services in all parts of the country. Today s licensing scheme imposes a service obligation on the licensee, implying that the licensee must be available and provide taxi services within the relevant district. The limitation on licenses available, in turn, provides the licensee with an exclusive right to offer taxi services within a given district. The scheme thus protects the taxi drivers from other car owners (often referred to as illegal taxicab operation) offering taxi services at only times and places that are most profitable. Competition from cars without a license would deprive the potential income of the licensee. The current licensing scheme can therefore be interpreted as a contract between the taxi industry and the society. The industry has certain duties related to availability, price and to offer services within a given district, and, on the other side, is protected against the competition from non-licensed cars. The contract provides a balance between the industry s duties and their respective rights. 3.4 The taxi market is characterized by several types of market failure The need for, and the design of, the regulation of the taxi market is also based on the fact that the market is characterized by several types of market failure. Market failure describes any situation where the individual incentives for rational behavior do not lead to rational outcomes for the group. The Norwegian Competition Authority has analysed sources of market failure in the taxi market (Konkurransetilsynet, 2015). They conclude that all main factors of market failure are present; asymmetric The need for regulatory restrictions on number of taxi licenses an economic analysis 16

17 information, economies of scale, imperfect competition, externalities and public goods. In addition, we find that the market for dispatch centrals are characterized by two sided markets and network effects. The Sharing Economy Committee (NOU 2017: 4, 2017) also points at different types of market failure. In the following paragraphs, we give a short description of the different types of market failure. We summarize the findings in Table 3-2 which provides an overview over the different types of market failure and their impact, in addition to the respective market it affects. Asymmetric information Information is unevenly distributed in the taxi market. This is due to the fact that information about price and quality can be difficult to attain for customers. The result is that taxi drivers have low incentives to compete on price. In addition, the customers have limited knowledge about what can be considered the correct price per ride, and to assess which way is the shortest. The customers can therefore be exploited by opportunistic drivers. The Norwegian Competition Authority argue that it is challenging for a customer to summarize all the elements in the pricing system of dispatchers. The different dispatchers have different fares and prices for different elements in the system; typically a starting price, a pick-up price, a fare per km driven, and a fare for time used. This makes it hard to compare prices for the customers. In addition, the customer does not know the accurate price until the trip is completed. New technological solutions could reduce this problem. For example, electronic services or apps, that calculate the price per ride in advance, could make it easier for customers to conduct such comparisons. The competition authority also argue that search costs depends on the customers localization, and that these costs will differ if one compares the hailing-market, taxi rank, or phone booking markets. The search costs of the first two markets consists, among other things, of waiting for a cheaper supplier. By declining an offer from a passing taxi, it is uncertain if another taxi will pass by shortly after, and that this taxi will offer a lower price. Meanwhile, one cannot hold the first taxi while waiting for a better offer. This reduces the customers possibility of making a comparison between price and quality. The most vulnerable customers are for example first-time visitors to a city, or customers with few alternative transportation options. Customers ordering a taxi by telephone, or through an electronic service or price-comparison app, on the other hand, have a better possibility of comparing prices of competing dispatch centrals, and thus have relatively lower search costs. In addition, the quality of the service is uncertain. The customer does nt know in advance whether the quality of taxis differs with respect to safety, comfort and driver s behaviour, skills and knowledge of the area. The presence of asymmetric information will first and foremost be a problem in the single trip market, and especially in the spot market. The contract market will be less affected. In the contract market, the customer will often be professional buyers with more time to assess the different tenders, and with more bargaining power than customers in the single trip market. Economies of scale Economies of scale in the taxi market is mostly related to the dispatch centrals. A dispatch central must conduct a range of administrative tasks. For instance handling contracts with licensees, administrate driving schedules, handle bookings from customers etc. The fixed costs related to these services could be distributed to all the licensees that are connected to the dispatch central. Thus, the administrative costs per license will decrease with the size of the central. In the contract market, a larger dispatch central could also compete for larger contracts. Economies of scale in the taxi market implies that there advantages of being a large dispatch central. The impact is that fewer and larger centrals will be present in the market. We discuss how this can affect the competition in the market in the following paragraphs about two sided markets and network effects. Two sided markets and network effects Dispatch centrals compete on both attracting customers and licensees. The licensees want to achieve the highest possible income, and a dispatch central with many customers will therefore attract more licensees. The customers on the other hand, want, among other things, to choose a dispatch central that offer a high degree of availability and short waiting time. This implies that a central with many licensees will attract more customers. This can, in economic terms, be described as two sided markets with network effects. More generally one could say that more license holders connected to a dispatcher attracts customers and more customers attracts more license holders. The presence of two-sided markets and network effects mentioned above will affect the dispatch centrals pricing incentives in different ways. The incentive to attract more customers will contribute to lower prices, while the incentive to attract more licensees will lead to higher prices. If asymmetric information makes the customers insensitive with respect to price, the latter effect could dominate. Furthermore, it will be easier for a dispatch central with a large network of customers to achieve a higher The need for regulatory restrictions on number of taxi licenses an economic analysis 17

18 customer awareness regarding how to order a taxi from the respective central, for example by marketing the central s telephone number, app or home page. A dispatch central with several licensees can also offer more favourable driving schedules, since it can distribute trips with the lowest income potential onto more people. The impact of both economies of scale and network effects contribute to the existence of larger and thus fewer dispatch centrals in the market. This will not necessarily harm the competition and the supply. Due to economies of scale, larger dispatch centrals, compared to smaller, can offer services at a lower cost. This will decrease the final price the consumer must pay. Furthermore, larger centrals are also more likely to offer services with higher quality, for example through shorter waiting times. Finally, a market with few dispatch centrals will make it easier for the customers to navigate in the market. However, in a market with few suppliers there is also a risk that the competition will be limited and that the agents will exploit their market power. It will, for example, be easier for the suppliers to coordinate about the pricing strategy in such a market. In markets with only one dispatch central this problem is likely to be large, since this supplier will have monopoly power. Limited competition and the exploitation of market power could lead to increased prices and reduced quality, and affect both the contract market and the single trip market. Externalities An externality is an effect that affects third parties who did not choose to incur that effect, and results in the over- or underproduction of a good. In their report, the Norwegian Competition Authority argue that the externalities in the taxi market could lead to pollution because of taxis that are waiting in line for passengers or are stuck in traffic jams. If this externality is not internalized when deciding on the number of licenses, the supply of taxi services will likely be higher than what is socially optimal. These external effects are most likely to be present in the single trip market, especially in the spot market. The Norwegian Competition Authority also discuss that that many available taxis, i.e. an overcapacity, can be regarded as a public good. 8 The customer value this overcapacity, since they want a taxi to be available when they have a need for transportation services. The licensees on the other side want to maximize their own capacity. Thus, the market solution could therefore lead to an underproduction of overcapacity. However, in our opinion this effect is present in most markets. We also question whether overcapacity can be regarded as a public good, since increased consumption of the good by one customer decreases the availability of the good for other customers. In addition, a dispatch central that are known for its availability and short waiting times, will most likely be able to calculate these factors into the final price in the market. Exchange costs The Norwegian Competition Authority also argue that there are other characteristics that limit competition in the taxi market. Previously, we discussed how asymmetric information made it difficult for customers to compare price and quality of taxi services. Independent of what information are available to the customers, there will also be certain physical characteristics in the spot market that contribute to market failure. In the hailing market, Customers often will choose the first taxi that arrives. Alternatives are also often limited at taxi ranks. In taxi ranks the rule of thumb is that the first taxi in line should serve the first approaching customer. In theory, the customer could choose another taxi, but in practice this does not happen often. This rule make it more difficult for customers to choose the taxi with the lowest price and best quality. 8 A public good is characterized by being non-rivalry and nonexclusive that is, individuals cannot be effectively excluded from use and the use by one individual does not reduce the availability to others. The need for regulatory restrictions on number of taxi licenses an economic analysis 18

19 Table 3-2 Market failures in the taxi market Market Failure Description Impact Affected markets Asymmetric information Information about price and quality can be difficult to attain for customers Low price elasticity of demand and less fierce competition between providers- increased price and/or reduced quality Single trip market, especially the hailing segment. Economies of scale Two sided markets and network effects Externalities Cost advantages for dispatchers with many license holders More license holders connected to a dispatcher attracts customers (expectations of higher availability) and more customers attracts more license holders (expectation of increased revenues) Effects that will not be considered by the market players i.e. effects on environment and congestion Few or only one dispatch central Increased risk for market power abuse increased price and/or reduced quality Same as economies of scale, but also reduces incentives for central dispatchers to compete on price. Supply of services above Socioeconomic optimum Market for dispatch centrals. Both in markets for single trips (telephone booking, taxi ranks and hailing segments) and contract trips Same as economies of scale Market for single trips Exchange costs Taxi rank systems and uncertainty with regards to waiting time for next available car leads to significant exchange costs for customers Low price elasticity of demand and less fierce competition between providers- increased price and/or reduced quality Taxi ranks and hailing segments Source: Oslo Economics. The table provides an overview of the different types of market failure that is present in the taxi market, the impact of the different types,and in addition to the markets that are affected. 3.5 International experiences substantiate concerns about deregulation Several countries have chosen to deregulate the taxi market, either completely or partly. In this chapter, we summarize the experiences from Sweden, Netherlands and Ireland. In addition we present results from some studies regarding the international experiences about deregulation. We refer to Appendix 1 for a closer description. Sweden chose to deregulate its taxi market in The deregulation involved removing the need-based scheme, the duty to affiliate to a dispatch central, and the price regulation. Stricter quality controls were also introduced. Different studies have shown that the deregulation had several effects. Prices increased by more than the consumer price index, the number of vehicles increased considerably and the waiting time for customers was reduced. The productivity and profitability in the market however deteriorated. Furthermore, the deregulation opened for establishment of several non-professional companies in the market. Today, certain cities are characterized by large supply, while there is a shortage of taxis in some rural areas. The Netherlands deregulated its taxi market in In the Netherlands, the need-based scheme was removed and free pricing introduced. There does however exist a maximum price regulation. There are some regional differences, and in certain cities, the taxis must be connected to an approved dispatch central. An evaluation from 2003 shows that the results from the deregulation has not been in accordance with the policymaker s intentions. For example, the market prices increased, but quality did not increase equivalently. The authorities therefore decided to keep the maximum price limit regulation, even though it was only supposed to last in a transitional period following the deregulation. Furthermore, the amount of taxis increased considerably. The evaluation also showed that turnover increased because of the increase in market prices, not because of increase in demand. In the four largest cities on the other hand, the increase in market prices led to a decrease in turnover. The need for regulatory restrictions on number of taxi licenses an economic analysis 19

20 Ireland deregulated parts of its taxi market in The background for the deregulation was a large discrepancy between supply and demand (Bekken & Longva, 2003). The authorities therefore suggested to increase the number of licenses, and that these new licenses should be awarded to current licensees. The supreme court of Ireland however decided that the suggestion to award the licenses to current licensees was outside the policymaker s authority. Instead, the limitation on number of taxi licenses was repealed (ibid.). Further regulation was maintained, for example price regulation and quality requirements targeting operators, drivers and vehicles. Bekken and Longva (2003), argue that there exists little documentation regarding the results for the taxi market outside of Dublin following the deregulation. In Dublin on the other hand, the supply has increased significantly, and the number of taxis have tripled. Since the spot market is dominating the market, this has led to a significant reduction in waiting time for customers. Bekken og Longva (2003) discuss that the price regulation further has led to stable prices, with a slight reduction in the quality. Several studies regarding the experiences from deregulation of the taxi market in different countries have been conducted. TØI (2010) summarize a few of them. They do for example highlight that Bekken and Longva (2003) review that the experiences with deregulation in Europe and the US lead to: 1. A considerable increase in the number of taxis, mainly in the spot and street market 2. A shift of supply towards hours and district with a higher demand 3. Market segmentation: Some large companies and many smaller ones 4. Often an increase in fares, especially in the spot market where prices is increasingly differentiated depending on the demand 5. Uncertainty regarding quality, which increases the need for regulation and closer supervision after some time 6. A deterioration in the income of the drivers longer working and waiting hours 7. A limited amount of new services has been observed. The same accounts for other technological developments. A review by the Danish Competition and Consumer Authority (Konkurrencestyrelsen, 2008) points at many of the same arguments as Bekken and Longva (2003): A repeal of the numerical limitation of licenses increases the number of taxis. The effect will be largest in the street market in the cities. The increased supply will improve the availability and reduce the waiting time for the customers. 3. The new agents in the market mainly perform services related to street driving. If current agents expand they mostly do this within the booking market. 4. Quality requirements for taxi owners, drivers and vehicles are important if the numerical limitation of licenses are repealed. 5. A repeal of the price regulation generally implies higher and more differentiated prices. The prices will rise more in the district than in the streets. Furthermore, the price increase is expected to be largest for street driving services. 6. For price competition to function properly, it is important that the customers can compare prices. Rules regarding price information gives the customers a better opportunity to understand and compare the taxi prices, and will improve the price competition. TØI (2010) argue that there have been few international studies that have examined the effects in the districts. A study from 2002, conducted by Marell and Westin regarding the effects of the deregulation in Sweden, concluded however that the repeal of the need-based scheme and service obligation only to a small degree affected the supply of taxi services in the districts (TØI, 2010). This is, among other things, explained by the dependence of contract-based driving in sparsely populated areas. The dependence makes it less likely that agents that has not been awarded a contract will establish themselves in the market at the short term. The study also found that more people combined the work as taxi drivers with other types of work. In addition, they showed that prices increased more in the districts than in the cities. According to TØI (2010) this may be a result of the supply of taxi services in the districts being less dependent on the need-based scheme, and more dependent on the income foundation and other public income sources. The review above gives an overview of the effects of deregulation in other countries. Similar effects are likely to occur in Norway. The review also shows that several aspects of the market must be considered. Different countries have chosen different models and degrees of deregulation. This will have different effects on the development of the market. Both geographic and demographic conditions also have great importance for the taxi market, and the review shows that there may be differences in how deregulations affect for example rural and urban areas. In an international comparison study from 2003 Bekken and Longva find that regulations will have different effects in different demographic and The need for regulatory restrictions on number of taxi licenses an economic analysis 20

21 geographic contexts (TØI, 2010). They therefore conclude that there is no single optimal way to regulate the taxi markets. Experiences from the Netherlands and Sweden also show that deregulations did not lead to the beforehand anticipated effects. The need for regulatory restrictions on number of taxi licenses an economic analysis 21

22 4. What will happen if the licensing scheme that limits the number of taxi licenses is repealed? In this chapter, we assess the consequences following a removal of the current licencing scheme that limits the number of taxi licenses. The analysis is based on economic theory, experiences obtained from deregulations in other countries and assessments of characteristics by the Norwegian market. We will focus on how the deregulation of taxi licenses will affect the supply side of the market, and the prices on taxi services. 4.1 Repealing the limitation on the number of taxi licenses will lead to a need for changes in other regulations In the following we will describe likely effects if the current licensing scheme is repealed. If the limitation on the number of available licenses is removed, we find it unlikely that the service obligation in place today could be upheld. The reason is that the suppliers no longer will have a compensation, by having a certain degree of protection from competition, to maintain the service obligation. The Sharing Economy Committee also states that if the scheme based on an assessment of the need for licenses should be removed, the corresponding service obligation cannot be upheld (NOU 2017: 4, 2017). In Appendix 2 we argue in detail why it seems unlikely that the service obligation will maintain if the current needs-based system is repealed. Besides repealing the limits on the number of taxi licenses and the service obligation, the analysis assumes that other regulations remains unchanged. This means that we try to isolate the effects of the repeal of the limitation on the number of taxi licenses and the service obligation. If such a deregulation should occur it will be necessary to analyse how this affects the assumptions that other regulations are based on. The importance for other regulations is not a theme for this report. However, we 9 The form of the current duty to affiliate to a dispatch central also implies a right to affiliate to a dispatch central. That is, the holder of the license has the right to affiliate to a dispatch central of choice. The dispatch central therefore has no possibility to decide who is going to affiliate. Thus, repealing the limits on the number of licenses and maintaining the duty to affiliate to a dispatch central, will will still point out, when relevant, certain challenges that could occur with respect to other regulations and need for changes in these regulations that might arise. This means among other things that we will describe how these effects can depend on maximum price regulations, and how the importance of such a price regulation might change following a repeal in the limitation of taxi licenses. An important factor regarding the assumptions on how the regulation will change is the duty to affiliate to a dispatch central. This is proposed to be removed from the Professional Transport Act in a recent public hearing, as described in chapter 2.2. If the duty to affiliate to a dispatch central is not removed, but the limitation on number of licenses and service obligation are, this will be a challenge for the taxi dispatches. 9 An analysis of these effects is outside the scope of this report, but will be important when forming new regulations. 4.2 A deregulation will lead to considerable changes in the markets As described in Chapter 3.2, the taxi market consists of different segments with respect to geography, time and products offered. The demand and presence of market failures varies between segments. Therefore, the consequences of a change in the market regulation will depend on how the market segment is structured. It is likely that t deregulation of the limitation on licenses will have both supply side and price effects. In the following we will describe expected supply- and price effects, and how these vary between market segments. We will also discuss other effects that might occur regarding the quality of the services and external effects, such as environmental and traffic effects Supply effects The current limitation on number of taxi licenses represents an important barrier to entry to the taxi market. If this barrier is repealed there is reason to assume that the supply of taxi services will increase. However, the effect will differ between attractive and less attractive market segments. eventually decrease the dispatch centrals ability to adjust its total supply in the markets and the quality of the services they deliver. The need for regulatory restrictions on number of taxi licenses an economic analysis 22

23 Each license holder will normally seek to optimise profits. It is therefore likely that license holders will offer their services in the most profitable market segments. That is, within hours and areas with high demand. The demand for taxi services are highest in the large cities, and at certain times during rush hours on weekdays, and past midnight at the weekends, see Figure 3-3. If the limitation on licenses is removed we would therefore expect to see more new entries in the large cities, where demand general is higher. Both existing and new license holder will to greater extent offer their services in areas with high demand than in less populated areas with lower levels of demand. Further, it is probable that the license holders will seek towards the most profitable trips within the district they operate. This implies that license holders will prioritize to supply services in the most profitable areas and hours. Such behaviour is already observed through so-called pirate-taxi markets, that are more likely to occur in areas and hours with high demand and shortage of traditional taxis. As shown in chapter 3.5 and Appendix 1, experiences from countries that have deregulated show that removing the limitation on taxi licenses lead to an increase in the number of taxis. There has also been an orientation of supply towards areas and hours with higher demand. To match variations in demand, more license holders will probably also operate only part-time. 10 Part time license holders and drivers will maximise their income by offering services in areas and hours with high demand. This implies that less priority will be placed on supplying services in less profitable segments of the market. By doing so part-time drivers will deteriorate profits in the attractive segments of the market and reduce the income of full time drivers. In today s regime license holders, due to the obligaton to supply services, use profit from attractive segments to cross-subsidize unprofitable trips. If the limitation on number of licenses is removed, there will be no incentives to maintain the level of supply in less profitable segments. This might lead drivers that used to have taxi-driving as their main occupation, to switch to only supply services part-time. In areas and hours where the demand base is lower one should therefore expect a decrease in the supply of services. In areas and hours with little potential for revenues the supply could also be completely removed. This could typically be in sparsely populated areas with long travelling distances. 11, or certain hours at nighttime in large parts of the country. Also within or near the larger cities there might be market segments that will not be served if there is no obligation to provide services. This will typically be in parts of the city that has relatively less demand than the most central parts. Examples of this can be found in Arna, north of Bergen, where one has designated licenses for this particular area to secure a satisfactory supply. The organization of work shifts is organized by Bergen Taxi (Hordaland fylkeskommune, 2016). To compensate these license holders, they are given preferential to ordered trips in Arna. Also on Askøy, availability of taxi services has been reduced after this area became part of the same service area as Bergen, and the need for designated licenses has been discussed also there. Similar examples are also found in different parts of Akershus that shares supply area with Oslo. The supply of taxi-services in Ski and Follo has been low due to taxis prioritizing trips in Oslo. In Bergen Taxi, Norgestaxi and other major central dispatchers there has also been a general need for active coordination of the combined taxi fleet to secure a satisfactory level of service in all areas. Some central dispatcher has also introduced compensation-arrangements to secure supply in less profitable segments of the markets. Such arrangements can be preferentials for ordered trips as described for Bergen, but also minimum wages for certain shifts or cross subsidizing between high and low priced trips. Furthermore, it is common among central dispatchers to have sanctions if drivers are not willing to accept unprofitable trips. This might be fees, or that the dispatcher for a certain period will not allocate trips to the driver in concern. 10 The Professional Transport Regulation 45 today requires that license holders in most cases can not have another main occupation or full time position. It is however the obligation to provide services that imposes the license holder to have the car available at all, or certain hours. If the obligation to provide services is removed, we assume that also the requirement for main occupation will be removed. If this requirement is maintained it will however not detain the possibility for license holders to supply services only in the most profitable areas and hours. 11 In rural areas, the contracting markets also constitutes a large part of the market. According to TØI (2010) the public contract market in some rural municipalities accounts for % of the revenues. In the largest cities, the equivalent share is 10-20%. In such areas, the supply of taxi-services is perhaps more dependent on the revenues from the contracting market, and less dependent on the licensing scheme. A removal of the limitation of number of licenses in these areas will therefore not necessarily lead to increased supply in any segments The need for regulatory restrictions on number of taxi licenses an economic analysis 23

24 The examples above shows that there exist market segments that will not necessarily have satisfactory level of supply without obligations to do so. Furthermore, that these market segments, whether they are areas, hours or single trips, exist in both rural and urban areas. The existence of designated licenses for Arna, part of Norway s second largest city, implies that such segments exists in most parts of the country. More specifically it shows that without the existence of limitation on licenses and affiliated obligations to supply services, it can be difficult to maintain a satisfactory level of supply also in urban areas. With regards to this, one must take into account that Norway, in a European context, is a sparsely populated country with long distances and low potential for demand most places. Data on revenues and number of trips with passengers in different areas, combined with experiences from Bergen and Akershus, show that one only in few cases can expect that the market is large enough for it to be commercially profitable to supply taxi-services at all hours. Furthermore, relative profitability is of importance. A market that in Norwegian terms should be relatively attractive, might be perceived as little attractive if it is located near more heavily trafficked areas. It is therefore difficult to draw a distinct line between areas that would be served in the absence of obligations to do so, and areas that will need regulation to secure an acceptable level of supply. There is a risk that even in the largest cities Oslo and Bergen, there will be certain areas and hours that would be served or have very long waiting times at certain hours Summary of supply effects and the need for a different regulation Repealing the current needs-based system, and thereby also the service obligation, will affect different market segments differently. The supply of taxi services is likely to increase in attractive market segments where the demand is high, while it s likely to decrease, and might disappear, in segments where the income potential is low. Large variations in demand between areas and over time, indicate that there will be areas and/or time periods where taxi services will be reduced or obsoleted should the market be deregulated. This could for instance be large and sparsely populated areas, but also suburban areas that are close to more attractive markets, as well as even some hours, in parts of the larger cities. If the limitation on licenses should be removed, and thereby also removing the obligation to provide services, our analysis show that it will not be possible to uphold a supply of taxi-services in all areas at all hours. These problems will primarily affect the spot and telephone-booking markets. Given a wish to maintain a certain supply of taxi services in these segments it would thus be necessary to introduce some alternative form of compensation. An alternative to today s model is that the public compensates a predetermined level of supply in these segments through contracts with different suppliers. Such an arrangement would have similarities with existing arrangements in the contract market for hospital and patient travels, transportation of school children etc. A system of public purchases will not necessarily be administratively simpler than today's need s based scheme. First the authorities would have to identify market segments that are not adequately served in a market with free competition. Second, the authorities would have to determine requirements for the services to be purchased. One would also have to implement control mechanisms to ascertain that the requirements are being fulfilled. A procurement scheme may also give rise to state aid law issues, inter alia, to document the need for services in the various segments and that there is no illegal cross subsidization between sheltered and competitive markets Price effects It's hard to assess with certainty what will happen to prices if today s limitation on number of licenses and obligation to supply services are removed. Based on what we know about different types of market failure in the taxi market, we can however make some assumptions. In addition, we can look at experiences from countries that have deregulated the market. As for the effects on supply, price effects may vary between different market segments. Normally, in markets with well-functioning competition, increased supply will lead to lower prices. Thus, we would assume that prices would be reduced in segments where the offer is increased, and on the other hand, increased in segments where supply is reduced. Thus, in a well-functioning market we would expect to see price reductions in attractive segments, such as urban areas in peak hours, and increased prices in less attractive segments, such as sparsely populated areas, and hours of low demand in most parts of the country. Due to the various forms of market failures present in the taxi market, described in Chapter 3.4, this will not necessarily be the outcome in practice. As described in chapter 3, the spot and telephone booking segments are particularly afflicted with market failures that reduce price competition. This includes inter alia asymmetric information and searchand switching costs, implying that clients in practice are less inclined to react to changes in prices than if they were fully informed. Particularly in the spot market The need for regulatory restrictions on number of taxi licenses an economic analysis 24

25 there is reason to believe that a deregulation that increases supply will not lead to lower prices. Experiences from amongst others Sweden and the Netherlands show that prices might as wee increase in this segment. Also one should expect increased price differentiation between segments. One reason for possible increased costs in the spot markets is that increases in supply also increases total costs in the industry. The same demand is now met by an increased number of taxis, queues become longer and the capacity utilization for each license holder and driver decreases. License holders will therefore attempt to increase revenues and use possibilities to pass costs on to their consumers by increasing the final price. The increased costs can to some extent also lead to increased prices in other market segments While price impacts in market segments with increased supply are not certain, there is reason to believe that prices where supply is reduced will increase. In segments where market failure exists, prices can increase more than they would otherwise. This, because customers are less price sensitive than in a well functioning market. It is also possible that prices will increase in areas and hours that are otherwise profitable, for example in remote areas, and hours of little demand in urban areas. Those conclusions will most likely apply to both spot- and order markets. With respect to contract markets, price developments will be more dependent on competition between suppliers, that often will be dispatch centrals. It is difficult to say ex ante how a removal of the limitation of licenses will impact competition between the taxi dispatch centrals. This will also depend on whether the obligation to be affiliated with a taxi dispatch central will be continued. We will not analyse this topic in detail. In chapter 3 we have however described the various forms of market failure that reduce competition between taxi dispatch centrals both network effects and large firm advantages. If taxi dispatch centrals have market power in competition for contracts, costs that result from overcapacity and low utilization of vehicles in the various segments might also be passed on to tcustomers in the contract markets Summary of price effects and the need for a different regulation As shown in the discussion above, it is difficult to say something unambigious about how a deregulation would change taxi prices. In normal markets with well-functioning competition, demand and supply determine prices. If supply increases, and demand falls, prices will fall. In the opposite case a reduction in supply or an increase in demand will increase prices. These effects are also present in the taxi market, but in addition we have uncovered a number of different market failures in the various segments. Both asymmetric information, switching costs and possible utilization of market power due to reduced competition between dispatch centrals are pointing towards increased prices. In the taxi market, there are thus two effects that impact prices. The usual market mechanisms, where price is the result of demand and supply, and market failures. If supply reduces, these two effects most likely will increase prices. If supply increases, the the total effect on prices is more uncertain. All else equal, increased supply will decrease prices. Market failures are on the other hand pulling prices up. The total result will depend on which of the two effects dominates. This might be different in different segments, and the total effect in the market is therefore unclear. In segments where demand is low, and/or various forms of market failure impede price competition there is however a risk that prices will increase. Increase in prices for taxi services can be counteracted by use of maximum price regulations. In some segments such price regulations can become more important if limitation on number of taxi licenses is removed, and this leads to higher prices than today. This may be a useful tool in market segments where the deregulation leads to overcapacity and higher prices. The purpose for use of such means is that an overall goal of availability of taxi services also means that it should be possible for customers to acquire transportation at a fair price. The problem with price regulations is that one run the risk of reducing the taxi supply since it reduces the profit possibilities for license holders. Some areas and hours of low demand could be profitable to operate if prices are set freely without price regulation. As described previously, it may not always be possible to sustain a desired level of supply if limitations on licenses and obligations to provide services are removed. This problem might increase if maximum price regulations are maintained. In this case other regulations should be considered to compensate the industry for offering otherwise unprofitable trips. Alternatively, one would need to accept high prices that will conflict the goal of fairly priced services for all. 4.3 Other effects Beyond supply and price effects discussed above It is likely that a repeal of the limitation on taxi licenses and the service obligation could have other effects. Some of these effects are due to the presence of negative externalities. The need for regulatory restrictions on number of taxi licenses an economic analysis 25

26 In Chapter 4.2.1, we found that a removal of limitation on licenses most likely will increase supply in attractive markets with high levels of demand. Increased supply is related to some negative external effects related to emissions, congestion and idling at taxi ranks. These external effects will partly be internalised by license holder through taxes for road use and fuel. If not all these effects are internalised by the drivers, supply of taxi services could however be higher than optimal from a societal perspective. In Chapter we found that effects on prices are uncertain in segments where supply increases. The presence of market failures and increased total costs may increase prices. The same effects can also reduce quality. Asymmetric information and switching costs lead to customers not being able to separate between high and low quality suppliers. License holders may therefore seek to increase profits by lowering quality or worsen working conditions for drivers. International experiences show that quality may be reduced if limitation on licenses is removed. There might therefore be a need to introduce stronger quality requirements for both taxi owners, drivers and vehicles. Reduced quality and working conditions will also affect the repute of the industry and might impact recruitment adversely. This can in turn reinforce the negative effects on quality. In addition, a deregulation could lead to more actors wanting to supply taxi srvices as a part time job. This might also impact the quality of taxi services, since competence of full time taxi drivers on average is expected to be higher than of part time drivers. Reduced supply and availability of taxis in certain areas and hours will also reduce the emergency function that taxis provide for people with more or less acute need for transportation. For example transport to emergency rooms or hospital, that are not necessarily covered by ambulance. 4.4 Summary of effects and implications regarding need for regulation The desire to ensure availability of taxi services and the existence of several market failures, implies a need for regulation of the taxi industry. Today availability of taxi services to date is secured through obligations to provide services for the license holders. If limitation on number of licenses is removed it will be difficult to sustain this obligation. The reason for this is that license holders no longer receive any type of compensation, in the form of to some extent be shielded from competition, for their obligation to provide services. It is difficult to say with certainty what will happen if the limitations on licenses and obligation to provide services is removed. The taxi industry is by no means a homogenous market, and a deregulation will have different effects in different market segments, depending on the demand for taxi services and the presence of market failures. Based on economic theory, elements of the Norwegian taxi industry, and international experiences with deregulations we can however anticipate some effects in varioust market segments. We expect that the supply of taxi services will increase in areas and hours of high demand, and be reduced in areas and hours with low demand and profitability. Today s supply in areas and hours with modest demand will be reduced or disappear altogether. This viewpoint is also shared by the Norwegian Competition Authority (2015) that has expressed in their recommendations for the taxi market that Some districts may be without a supply of taxi services if the needs-based assessment of licenses is omitted. In our opinion, the great variation in demand over geographical areas and hours indicates there will be un profitable market segments in large parts of the country, also within or near the bigger cities. Also The Sharing Economy committee addresses that a removal of the service obligation can weaken supply in sparsely populated areas, though opinions are divided over the unambiguity of this conclusion (NOU 2017: 4, 2017). The majority of the committee points to targeted measures that can be considered if supply in rural areas are reduced. They have not however analysed the potential impacts of such measures. The minority of the committee addresses that a country with a widely-spread population are dependent on having taxis in contingency. The minority also believe that removing the needs-based assessment and service obligation particularly in remote areas, will substantially reduce the supply, and in the worst-case scenario negatively impact life and health. The effects on prices are uncertain. International experiences with deregulations indicates increased increased and more differentiated prices in most cases. In line with economic theory, we expect increases in prices if supply is reduced. In areas were supply increases, increased competition will reduce prices, while increased costs and market failures will increase prices. In segments with low demand, and/or various forms of market failure that reduce competition on price, there is a risk for substantial price increases. Increased prices can be counteracted through regulations of maximum price. The use of such regulation an on the other hand increase the number The need for regulatory restrictions on number of taxi licenses an economic analysis 26

27 of market segments that are no longer serviced in a deregulated market. Due to externalities, a removal of the limitation on licenses could also lead to other undesired consequences. In larger cities, increases in supply in periods of high demand will lead to increased emissions and increased congestion. The analysis shows that the the current regulation in the form of needs-based assessment for number of licenses is an important measure to fulfil the goal of availability of taxi services in in all areas. If the regulation on number of licenses is removed, there will be a need to introduce an alternative compensation mechanism to ensure that also commercially unprofitable market segments are served. A natural alternative would be government or municipal purchases of taxi services. Such a solution could on the other hand be demanding to manage and increase public expenditures. The need for regulatory restrictions on number of taxi licenses an economic analysis 27

28 Appendix 1: The taxi market in other countries In this Appendix we take a closer look at the taxi segment in Sweden, Denmark and the Netherlands. In both Sweden and the Netherlands taxi segments are deregulated. Denmark on the other hand has recently initiated the legislative process to liberalize the taxi market in Denmark. Sweden The 1990 deregulation In 1990, Sweden deregulated its taxi segment. This implied five major changes (Nilsson, et al., 2013): The earlier regulation that required needsbased analysis to enter the market were replaced by free market entry The obligation to be affiliated with a taxi dispatch central was abolished Price regulations were replaced by free price setting Increased control with respect to the aptitude / fitness to be a taxi driver (Skärpt lämplighetsprövning) Special requirements with respect to taximeter and price information The goal of the deregulation was to create conditions for better service and availability of taxis, both from a geographical and time-of-day perspective. Another goal was to increase competition, make taxi services more effective, and reduce prices,. The deregulation has changed several elements of the taxi industry. Analyses show that prices of private taxi companies have increased more than the consumer price index (Nilsson, et al., 2013). Over the period , the average yearly price increased nearly 4 percent. Meanwhile the Consumer Price Index (CPI) increased by 2 percent per year over the same period. Public funded transportation did not increase to the same extent, which could reflect an increased consumer bargaining power in public procurement compared to the single trip market. The number of registered vehicles in the same period increased by 22 percent, adjusted for population increase. Nilsson et al. (2013) describe that the taxi product has changed, first and foremost through reduced waiting times. At the same time, productivity decreased, which primarily reflects the increased number of vehicles. According to Nilsson et al. (2013), no analysis takes into account the overall effects of lower productivity, higher prices and better availability. The authors point out that the netto advantage of the deregulation is based on the costs customers assign to waiting times. Nilsson et al. (2013) also show indications for increased crime rates after the reform, mainly in the form of unreported incomes. This seems to be a result of decreased profitability in the market (SOU 2016: 86). Instead of increased competition, the market developed more towards an oligopoly (ibid.) A significant negative effect of the deregulation was that many of the entrants mislead customers with inappropriate pricing, and also did not pay taxes and fees (SOU 2016: 86). This contributed to harm the industy s reputation. Measures were taken to address this problem (ibid.). According to SOU 2016: 86, there is an overcapacity of taxis in certain large cities, while there are too few or no vehicles in certain rural areas. Overcapacity leads to low utilization levels for each taxi. SOU 2016: 86: Taxi and carpooling today, tomorrow and the day after tomorrow 12 Assessing that the Swedish taxi market did not work sufficiently well, the Swedish government decided in July 2015 to initiate an official Swedish report on possibilities for stricter regulation of the taxi market. The government pointed towards many drivers having unsatisfactory working conditions, and that specifically in larger cities it was difficult to choose the right taxi (Johansson, 2015). Serious companies risk to be pushed out of the market by less serious companies. The government thought that it was important to tighten market regulations and standards, to ensure customers and drivers safety, but also out of consideration to Sweden s position as a trading partner and tourism destination. The government also thought that it would be a contribution to realize the goal to have the EU s lowest unemployed figures in The mandate for the analysis was to shed light on if and how the use of taximeters could be made obligatory, and to look at opportunities to define new categories of taxi-like businesses without the requirement of taximeters. Furthermore, it should be assessed how one can differentiate between carpooling and pure taxi businesses. This due to problems with taxi-like carpooling services that had been established on commercial basis. Combined with new rules and regulations that have already come into effect the government hopes that 12 Taxi och samåkning - i dag, i morgon och i övermorgon The need for regulatory restrictions on number of taxi licenses an economic analysis 28

29 the proposals that follow from the analysis will lead to a better functioning of the market. The proposed changes in regulations are rules to allow law enforcement to un-register and confiscate keys to vehicles that are not fit for traffic, rules to inform customers about prices in advance, as well as new accounting requirements for the industry. SOU 2016: 86 Taxi och samåkning - i dag, i morgon och i övermorgon was handed over on November 30th The investigation was presented at a hearing on March 13th, 2017, but the government has not finished / closed the case. Denmark Current regulation of the taxi segment in Denmark Denmark, like Norway, use needs-based assessments to decide the number of taxi licenses (Transportministeriet, 2013). The license is given by the municipal council (kommunalbestyrelsen). The council decides the total number of taxi licenses per municipality to ensure a satisfying supply in each area. Municipalities decide the number of licenses based on discretionary considerations, and licenses are given for a period up to ten years. The licenses have geographic limitations, and taxi services should in principle take place in the municipalities where the license was issued. In municipalities with ten or more taxis, taxis are required to be affiliated with a central dispatcher, that receives and delegates requests for taxis. In municipalities without dispatchers, it is possible to establish a common phone line to ensure round the clock supply of taxi services. Municipalities can also require such a solution if there are problems with securing supply of services during all hours of the day. The municipality also decides maximum prices and fees. Agreement on new taxi Act Denmark s government and the Danish opposition parties have decided to liberalise the taxi industry. The government presented a proposal to modernise the current Act in December 2016 (Transport-, Bygnings-og Boligministeriet, 2016). According to the government, the reason for this modernisation is an unwanted development in the Danish taxi industry. There has been a recession in the taxi industry and the number of taxis have fallen substantially as shown in. In some areas, particularly rural areas, it has no longer been possible to order taxi services. The requirement for round-the-clock availability lead many taxi owners to give up their business. The unregulated and illegal taxi market on the other hand have flourished, particularly represented by Uber. The government welcomes new business models and digital technologies but nevertheless see a need for regulations. The government therefore want a balanced modernisation of current rules and regulations. The main feature of the new model is the abolishment of municipalities limitations on number of licenses, and that all drivers that fulfil the general requirements for good repute will have the right to acquire a license. Geographic limitations are further abolished so that the entire country becomes one common market. Licenses can currently be distributed only to legal persons, but also companies should in the future be allowed to run a taxi business. Figure 0-1: The development in the number of taxis in Denmark Source: Transport-, Bygnings-, og Boligministeriet There will also be introduced requirements for sale of trips to private person to go through a taxi company or taxi office, a so called «kørselskontor». It will require a license to run such offices. In order to ensure serious businesses there are several requirements to receive such licenses. Taxis will be obliged to be affiliated to such offices, but the offices can themselves choose whether to accept drivers to affiliate with their office. In rural areas this regulation can be exempted so that it becomes cheaper and easier to establish taxi businesses there. Finally, the currently effective obligation to provide services round-the-clock will be abolished, and the taxi business themselves can choose which services to offer with respect to opening hours, geographic coverage and offered services. Taxation, customer protection and traffic safety are also regulated, as shown below. The need for regulatory restrictions on number of taxi licenses an economic analysis 29

30 Figure 0-1 Control with taxes, customer protection and traffic safety will be maintained Source: Transport-, Bygnings- og Boligministeriet The Netherlands As for Sweden, the Netherlands have deregulated the taxi market. This happened in The goal was to strengthen the role of the taxis in the personal transport business, improve market mechanisms, and increase competition (Baanders & Canoy, 2010). The taxi market in the Netherlands before the deregulation Before the market liberalisation, the Netherlands had a needs-based analysis system, where the 12 provinces were responsible for distributing licenses based on an assessment of demand and possibilities for profitable operation (Baanders & Canoy, 2010). The authorities also regulated tariffs, and there existed quality requirements for operators, drivers and cars. Licenses were given for different zones, and it was forbidden to pick up passengers beyond those zones. After an evaluation of the passenger transport act from 1988 (Wet personenvervoer), the authorities concluded that it was difficult to gain access to the market and that the protection of existing operators was too strong (ibid.) The market value of the licenses were seen as too high compared with the cost structure. The links between local authorities and the taxi industry were also seen as too tight, and it was assumed that a centralisation would solve this. The deregulation The deregulation abolished limitations to numbers of licenses. The authorities expected that as a result of the deregulation, competition would increase and operators would adjust to customers preferences to a greater extent (Baanders & Canoy, 2010). Increased quality, lower prices and more innovative services would result in more individuals choosing taxis. The distribution of taxi licenses was centralised to national licenses, but there are possibilities for regional differences with respect to certain requirements, such as knowledge of local areas etc (SOU 2016: 86). Each taxi driver must also hold a taxi driver permit. Prices are not regulated apart from maximum fares. According to Baanders & Canoy (2010), the maximum fare should in principal only apply in the transition period Because of unexpected price increases, the maximum price was perpetuated beyond the transition period. There is still also a compulsive tariff structure. In some bigger cities, local rules exist that all license holders must be affiliated with an officially acknowledged dispatching centre with at least 50 vehicles and 100 drivers (SOU 2016: 86). The aim of this is to be able to set quality requirements with respect to car standards, language capabilities and local knowledge of the area etc. Only vehicles that are part of such an organisation can draw customers from taxi ranks. The Dutch taxi market is divided in several segments. There is a difference between the contract market and the other markets. Contract markets serve primarily clients with special needs, such as handicapped, people of older age, but also hotels, etc. The other markets are divided in two. Call taxis that are reserved through a centralised office, and street taxis are also allowed to pick up passengers from taxi ranks and from the street (Baanders & Canoy, 2010). 13 The last-mentioned type must also have a taximeter (SOU 2016: 86). The various segments have difference incentives. Call taxis have incentives to provide high quality services, that customers choose the same taxi office again. (Baanders & Canoy, 2010). Only dispatch centres that themselves employ drivers can determine fares and advertise these. Dispatch centres that are organised as cooperations between taxi owners and small companies are not allowed to determine common prices with respect due to competition law. In the street taxi market, however, except in small communities, an operator or driver is unlikely to meet the same client a second time, so a good reputation is not important for him. the customer therefore has little negotiating power (ibid.). Customers often choose cars that are coincidentally passing, or are first in line at 13 Banders and Canoy (2016) highlight that not all countries consider all segments as part of the taxi industry. In France and UK for instance, contract markets are considered outside the taxi industry. In the UK and USA, there are only street taxis that are considered taxis, i.e. «yellow cabs» in New York, and «black cabs» in London). The need for regulatory restrictions on number of taxi licenses an economic analysis 30

31 taxi ranks. Street taxis therefore cannot attract customers by reducing prices, but can increase incomes by reductions in quality that reduce costs. A logical consequence is therefore that in a deregulated market the price of the street taxi tends to go up and the service quality tends to go down. Table 0-1 summarises the development towards 2003 nationwide and in the four main cities, and compare this with the expectations of the authorities before the regulation in The table does not cover the contract market. It shows that development has not been as anticipated by the authorities. Contrary to expectations fares have increased, while quality has not. A later evaluation in 2008 analysed price developments up to It showed that the fare increase was about 10 percent just after the deregulation, and that fares maintained this higher level (Baanders & Canoy, 2010). Turnover has also increased, but due to higher prices, and not increased demand. In the four biggest cities turnover fell despite the increase in prices. Table 0-1 Indicators for the taxi market in 2003 compared to authorities expectations of the deregulation Source: Baanders og Canoy, The table covers street taxis and call taxis, but not the contract market. The table also shows that there was a dynamic with respect to throughput in the market. There were many new entrants to the market, but also many exits. The number of vtaxis still increased with 50 percent in the four years from 1999 to 2003 (Baanders & Canoy, 2010). This increase also includes contract markets, that are not covered in the table, but the increase in non-contracts market contributes to the majority of the increase. (ibid.). The number of trips and the number of passengers nationwide dropped at the same time. While the number of kilometres driven with passengers increased (ibid.). This possibly points towards trips on average covered longer distances. The four biggest cities underwent both a reduction in number of trips and a reduction in number of kilometres driven with passengers. The need for regulatory restrictions on number of taxi licenses an economic analysis 31