Taxi Fare Regulation

Feb 09 2016

The Victorian Taxi Association (VTA) recognises it is no fault of the Essential Services Commission (ESC), but the timing of the current review of taxi fares is inappropriate given the prevailing uncertainty about the future extent of regulation of the commercial passenger vehicle (CPV) industry.

The VTA’s view more broadly is that fare setting in taxis should be deregulated.

Given the demonstrated inability to compel compliance with existing fare regulation by new market entrants, and the unlikely ability to do so in the future, it is only reasonable that all CPV providers be given the freedom to compete on fair terms.

What about surge pricing?

The VTA are yet to hear a compelling argument as to why price surging within the current context is not blatant price gouging. Increasingly, public commentary points to the fallacy of the idea that surges, up to a factor of 10 times, are motivated by a desire to increase supply at time of high demand. Only competition will be effective in restraining this kind of gouging and this will ultimately soften the market.

A genuinely competitive market with dynamic pricing across all service providers would result in competition for both drivers and customers during quiet and busy periods with the customer the beneficiary.

Naturally, there should be an expectation on all providers that there is transparency for customers as to the price they will be charged for any given journey. The mechanism by which this is achieved should be determined by providers.

One of the arguments in support of regulated fares is that increasing fares would harm the industry and the consumer because it would make it less affordable and as a result dampen demand for the service.

This was a justifiable argument while the Government controlled the number of taxi licences on the road, because the restricted supply could potentially lead to higher prices. With the removal of these barriers to entry via licensing, the market is now free to find its own equilibrium. If the industry were enabled to set its own price, and set it too high, this would be detrimental to its own financial sustainability. Most importantly, it would send a signal to the market and potential new entrants that there were business opportunities available to competitors. This process would naturally soften the price for the consumer because the new market entrants would absorb the additional demand, reducing overall returns to the commercial passenger vehicle services, resulting in the lowering of prices to attract new, and retain existing customers.

Arguably, one reason Uber are able to surge to the level they do is because there are no competitors similarly free to price dynamically and thus moderate their surges. For example, if taxi companies where permitted to price in a similar fashion, it is reasonable to assume that in the cases of such extreme surges, taxi companies would respond by undercutting the headline price thus leading to a softening of the market.

Government is left with a stark choice; continue to enforce regulated fares, and overhaul the laws, regulations and penalty regime to ensure compliance by all in the market; or move to a new market based solution which would see fares set by participants in the industry.

The myth of two markets

Ridesharing providers would like Governments to believe ridesharing is inherently different to taxi services – this is a myth which is perpetuated to justify maintaining two-tiered regulation preventing taxis from actively competing with ridesharing providers.

Not only is this concept of the market representative of an outdated perspective on the operation of CPVs but it is unsustainable and unenforceable. It is inconceivable that technology and consumer behaviour will not change in response to the development of the market, therefore fundamentally shifting the definition of rank and hail work. Regulation which tries to maintain this distinction holds taxis back from truly competing with new market entrants and will lead to the need for further reform in the near to medium term.

The role of technology

Another factor that must be considered in this discussion is the ability of modern technology to better align demand and supply. For many years regulators have tried to create various price points for a taxi based on demand patterns. The issue with this approach is that it is necessarily broad and accounts only for a generalised and rudimentary demand pattern, and cannot account for localised or specific demand patterns. Different areas, different demographics and different service types do not necessarily have the same demand patterns. New technology means that businesses are better equipped to accurately measure demand in real time and price accordingly.

The Victorian taxi industry is ready to embrace competition in regards to how fares are set. The VTA wants to see a dynamic and diverse industry in which companies must compete for the customer. Some businesses will fail, some new services will emerge and the industry will change in ways we cannot anticipate – with the customer the beneficiary. This vision can only be realised if everyone is following the same rules. 

Read the VTA's full submission here

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