This article was originally published in a longer form by the Indian magazine Swarajya.
I’d like to begin with a small confession. Ever since I read Bruce Yandle’s “Bootleggers and Baptists — The Education of a Regulatory Economist“ (1983), it has become a cherished pastime of mine to view the many industries of the modern economy through the lens of the bootleggers and baptists analogy. Naturally, I was not surprised to find that that analogy was also useful in explaining the direction of taxi regulation in our country.
The Bootleggers and Baptists Analogy
At the time of Yandle’s writing, many states in the United States had laws which banned the sale of alcohol on Sundays. These laws were not only supported by conservative baptists, who viewed alcohol as demonic, but also by bootleggers (illegal traffickers of alcohol) who made good money selling alcohol illegally on Sundays at higher prices.
While baptists would publicly lobby for the Sunday ban on the sale of alcohol, bootleggers would help out local politicians who were (and are) perennially in need of re-election funding. The law banning Sunday sales would contain no provision for banning the consumption of alcohol. This would ensure that both interest groups stayed happy.
And what about the consumer? The answer is simple; they get the short end of the stick. The higher prices due to the ban make their pockets lighter. In effect, it is the (un)holy alliance of baptists and bootleggers which would cause prices to increase.
Here is how Yandle explains it:
I asked myself, what do industry and labor want from the regulators? They want protection from competition, from technological change, and from losses that threaten profits and jobs. A carefully constructed regulation can accomplish all kinds of anti-competitive goals of this sort, while giving the citizenry the impression that the only goal is to serve the public interest.
Another place where I’ve seen such behaviour is Bengaluru, where tree-hugging “environmentalists” support high requirements for open spaces in new townships. Initially, I suspected that all private developers would oppose regulations which impose such requirements. Later on, I found out that many private developers (catering to the upper-middle classes and above) who have amassed sufficiently large land banks have no objections and, in fact, support such requirements. Who suffers as a result of this?
- New developers and older, smaller developers who aren’t able to amass large land banks and so have to face bigger roadblocks in competing with established developers.
- Buyers, who now have to pay higher for purchasing housing units; the poorer the buyer, the bigger the relative impact of such regulation.
And this will go on because the media, under the influence of the “baptists” (i.e., the tree-huggers), will continue to project the open space requirement as being in public interest.
Taxi Regulation in India
The taxi industry in India is affected by a similar alliance among interest groups and is governed by the Central Motor Vehicles (MV) Act of 1988. The MV Act provides a broad framework which enables states to put in place rules for permits, regulate prices by setting maximum and minimum fares, limit the total working hours for drivers and so on. And the states have not resisted the temptation to act on these requirements.
The states do so by bringing out various “schemes” that taxis can operate under. Each scheme governs a different part of the sector and, thus, brings in a certain element of choice for taxi operators with respect to the regulatory structure they want to come under. There is still an underlying assumption that planners have perfect knowledge of the market and so can fix prices themselves. There is also an assumption that there is a need to reduce “uneconomic competition” in the sector by introducing constraints on the supply via driver and car requirements. These regulations are among the remnants of the pre-1991 thinking.
These regulations today acts as a barrier to organizations like Uber that seek to enter the market, but face opposition from both the “bootleggers” (the established taxi companies) and the “baptists” (the “consumer protections” groups). As a result, Uber and Ola do not want to be governed by the framework set out in the MV Act. They want to be recognised as a technology company and, therefore, be governed by the Information Technology (IT) Act of 2000. The two companies want to call themselves technology companies because the IT Act is not as stringent as the MV Act. If they ever come under the MV Act, their current business models would be termed illegal and shut down. The only way they can operate is by calling themselves tech companies and take advantage of the legal ambiguity.
While the need for aggregator companies to call themselves tech companies is reasonable (in India and elsewhere), it isn’t really the case. To me, they are transportation platforms using cool technology.
Christopher Tang describes the phenomenon as it happened in the US, and the benefits it brings:
...Uber fare is getting cheaper and Uber drivers are earning more over the last three years (preceding 2015). How can this happen? Network effect is one driver, and efficient operations is the other driver. As more passengers embraced Uber in major cities such as Los Angeles, New York City, and San Francisco, more Uber drivers entered the market. Consequently, more Uber drivers on the road, the waiting time for passengers and the idle time for Uber drivers become shorter.
An added benefit of these aggregators is that both user groups get to rate each other. While the commuters rate drivers after the ride, drivers too rate commuters. This forces both user groups to be nice and deal fairly with each other. This also contributes to the network benefits of the aggregators and helps them differentiate themselves from other models of taxi services and even premium bus transport. By monitoring the behaviour of both the user groups through ratings, the aggregators can root out the bad apples. The “rooting out” part helps build trust in the platform and the service among both the user groups. For instance, rarely do you see drivers with a rating below three on five on Uber. They most probably have been rooted out as bad apples among the drivers. This contributes, in no small way, to the fact that large portions of the middle class have reasonably high levels of trust in these aggregators. My cousin usually books a cab on an aggregator app for her mother who lives in a different part of Bengaluru from hers. She prefers aggregators to normal taxi cabs as she can track the location on her app and need not worry much about travel safety.
Surge Pricing
Another important part of the business model is the use of surge pricing. Many readers get angry when they read about surge pricing. Several economists and intellectuals on the centre and on the left have for long defended regulation as a mechanism to improve “allocative efficiency,” reasoning that individual players in the market have no incentive to adopt “better” or “necessary” practices if other players refrain from doing the same. The reason most good economists (and students of economics like me) love surge pricing is that it increases market efficiency (by serving those commuters in areas where the supply of taxis at a particular point of time is low) without any specific government requirement for them to do so. Surge pricing is a very efficient way to get drivers to ply in those areas where demand outpaces supply. How would planners and other government officials attempt to solve the problem of demand outpacing supply in certain areas of the city for brief periods of time? Here are two counter-productive measures (there will be more):
- Bring in regulation to make it a punishable offence for drivers to say no. This is already in place in most states.
- Mandate that taxis in a particular scheme operate only in a particular area of the city. The police constables on traffic beat would love such a regulation.
While many commuters know that taxi availability was a problem earlier, before Uber and Ola solved the problem to a large extent, they didn’t seem to understand the role played by surge pricing in solving this problem. It is crucial to understand that surge pricing (or some variant of it) is necessary to ensure commuters experience continuous taxi availability. This experience gives many commuters the confidence to make decisions which would not be possible if they thought getting a taxi would be difficult at a certain time. For instance, surge pricing and the resulting continuous taxi availability would give people the confidence to, say, enjoy their drink at a club and expect to get an Uber or Ola cab back home even when it’s late at night.
Some people point to surge pricing as a problem.
- They ask: Isn’t it immoral to profit out of shortages?
- They accuse: Surge pricing is not transparent and is rigged by the aggregators.
- They pose rhetorical questions: What if you are stuck in a place late at night with no buses or autos in sight, and you can’t afford surge prices?
Responses to these pointers are quite simple:
- It is NOT immoral to profit out of shortages when you are alleviating those shortages in the process.
- The lack of transparency in surge pricing is of no consequence given the fact that users have a choice and are affected by surge pricing only if they choose to.
- Again, users have a choice. If not for surge pricing, there is a possibility that they may not even have a choice.
Bootleggers and Baptists in the Taxi Industry
While the “bootleggers” (the established taxi companies) don’t even pretend to be acting in public interest, the anti-competitive rules and regulations that they support and lobby for is legitimised by the “baptists,” i.e., the consumer protection activists who pretend to act in public interest through the media.
For a sense of just how expansive the regulations can be, take a look at the draft of the Maharashtra City Taxi Rules, 2016. The rules are calculated to restrict more taxis from entering the market, decrease the competitiveness of new competitors by imposing onerous requirements, and try their very best to make the business model unviable.
The draft rules make it mandatory for half the cabs operating on a platform to have an engine capacity of greater than 1400 cc, and no cab has an engine capacity lower than 980 cc. Both aggregators, Uber and Ola, aggregate cabs and don’t operate them. The drivers themselves decide what kind of car to buy. The aggregators, like they should, aggregate. Moreover, both the aggregators can offer lower prices with cabs equipped with lower engine capacity (higher mileage) and, therefore, expand the market.
Cabs operated by the aggregators would be barred from taking street hails. This rule, in my opinion, has been inserted for three reasons.
- It will help the “bootleggers” avoid competition for untaxed income via street hails.
- It will help the traffic police earn extra money for their chai, coffee, and breakfast expenses.
- The rule would possibly be used as a tool for harassing the aggregator licence holder.
3. The licence fee for cabs with an engine capacity under 1400 cc would be Rs 25,000, while the same for cabs with an engine capacity of 1400 cc or more would be the exorbitant sum of Rs 2,61,000. Moreover, the aggregators need to pay Rs 50,00,000 per 1,000 cabs aggregated as a security deposit.
The Impact of Regulation
The impact is easy to see — price increases, accompanied by a possible demand drop in the price-sensitive segments, increased costs to consumers and decreased income opportunities to drivers. We might even see Uber and Ola get out of a few cities after initially attempting to comply.
With the entry of Uber and Ola, we got to see what some economists call spontaneous liberalisation or spontaneous deregulation. They pushed the boundaries of administrative law and transformed the taxi industry in India. Damien Geradin, GMU professor of Competition Law and Economics, in his paper “Uber and the Rule of Law: Should Spontaneous Liberalization be Applauded or Criticized?” rightly described what Uber had done in the US as “a needed electroshock in an industry whose actors had often become complacent and failed to meet user expectations.” It is fair to say that both Uber and Ola have done the same in India.
The rules that our state governments are now bringing out will force the industry to regress to it previous “normal” of bad customer service, higher prices, and erratic taxi availability. It is an attempt at turning back the clock on a technological upgrade. In fact, through Uber Pool and Ola Share and even other regular offerings, they have possibly brought in more innovation to the sector, and public transit at large, than the last 70 years of government domination.
