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Discussion Paper
Principles for the regulation of for-hireroad transport passenger services
Richard Darbéra

2015Principles for the regulation of
for-hire road passenger
transportation services 1
Draft version October 11th 2015

Richard Darbéra <darbera@enpc.fr>
Introduction ..................................................................................................................... 2
Four centuries of taxicab regulation ...................................................................... 2
A vanishing border ........................................................................................................ 3
A new actor ...................................................................................................................... 4
The new actor’s name ............................................................................................. 5
Why regulation is still necessary ............................................................................. 6
Lexicology .................................................................................................................... 6
How the Mayor of London came to regulate PHVs ...................................... 6
The three levels of regulation: car, driver, operator ........................................ 7
The vehicle................................................................................................................... 8
The driver .................................................................................................................... 8
The operator ............................................................................................................... 9
Regulating the use of public space ....................................................................... 10
The fourth level of regulation ................................................................................ 12
The danger with dominant Transportation Network Companies ...... 12
Threats to drivers .................................................................................................. 13
Threats to customers............................................................................................ 14
Threats to government ........................................................................................ 14
A possible solution ................................................................................................ 14
Conclusion ..................................................................................................................... 15
Box - Heading the wrong direction: the French case .................................... 16
References ..................................................................................................................... 20

1 Discussion paper for the workshop “Principles for the regulation of for-hire roadtransport passenger services” 26-27 October1

Introduction
1.
All over the world, the rapid spread of app-based private for-hiretransport services competing with the traditional taxis has taken
regulators by surprise and faced massive and sometimes violent
reaction from the taxi drivers and taxi licence (medallion) owners.

2.
Everywhere, politicians are pressed to legislate. And they face adilemma: whether to satisfy the social demands of taxis for protection
against this new competition or whether to support change so as tocater for the tremendous popularity of these new services.

3.
The social and political reasons for responding to the claims ofthe traditional taxi industry are well grounded but they are mostly
short-term. We are here more interested by a longer-term perspective
and propose to present some principles for the regulation of for-hireroad passenger transportation services based on economic
considerations.

4.
Some of these principles have already been partly applied byregulators in some countries; in some other countries they have been
wilfully ignored. We will draw examples from both to identify feasibility
and pitfalls of some principles we put forward.

Four centuries of taxicab regulation5.
Since the first half of the 17th century, when it first appeared in
Paris and in London, street hailed private transport has been regulated,with regulations controlling the supply in terms of both price andquantity.
6.
In both cities, dramatic deregulation happened from time to time
when, on the occasion of political upheaval or technical revolution, theregulated operators lost their grip over the regulator they had captured.
However, very soon the same regulation came back with regulated fares
and capped supply or Malthusian barriers to entry.

7.
This persistence of economic regulation is explained by the needto compensate for market failures in this industry.
8.
As explained by Fernandez et al. [2006] the first failure comesfrom the lack of what has been called “supply-demand
synchronization”. At any given time during the operating period, but atdifferent locations in the geographical area, there are empty taxis
looking for passengers and passengers waiting to find an empty taxi.
Therefore, passengers must spend time waiting, although empty taxis
exist. When prices are not regulated, if the passenger does not like thefare charged by the first empty taxi arriving to the place where he islocated, he must wait for the arrival of a new empty taxi, with the hopethat it will charge a lower fare. Therefore, to have the option to choose alower fare he must incur a special cost, equal to the value of theadditional waiting time multiplied by the cost of uncertainty about the2length of this waiting time. This constitutes an important market
imperfection that gives to individual taxi operators some power overprice determination.

9.
The second failure has to do with the quality of the service. Since
the probability for the taxi driver to be hailed by the same customer inanother occasion is negligible, he has no incentive to provide a good
service and not try to cheat. Conversely, when hailing a taxi, thecustomer cannot assess if the vehicle is in good mechanical condition orif the driver is safe. This quality control has to be performed by somelicencing authority with the power to bar the vehicle or the driver fromthe profession. Barriers to entry are a way to make the threat ofsanction effective and to lower the costs of control.
10.
Looking for hails, empty taxis cruise in the street and flock at
strategic locations where the probability to pick up rides is highest. This
causes congestion. Capping the supply is also a way to limit thiscongestion.

11.
With the advent of mobile apps, these economic justifications forregulating prices and quantities that prevailed for four centuries
suddenly disappeared (at least for the market of consumers owning
app-capable mobile devices). When booking a ride with an app, thecustomer is informed of the tariff and can get an estimate of the final
price of his journey. He can compare prices and waiting times fromdifferent competing providers. No problem of quality either. Since users
rate the drivers after each ride, unsatisfactory drivers are ruled out by
the ride-hailing apps’ operators.
12.
It is interesting, in this regard, to note that users show aconfidence in these services that goes beyond the mere question ofquality. According to 6-t, a consultancy that carried out a survey among
6476 French and Swiss Uber users and among 1001 French taxis users,“53% of Uber users declare that they are favourable to the idea ofallowing their child to travel unaccompanied with a private hire service
while only 38% of taxi users would let their child travel alone in a taxi”[6-t , 2015, p.166].

A vanishing border

13.
Since the 17th century, the regulators made a clear distinction
between two types of for-hire transport. In France, it distinguishedbetween voiture de place that corresponds to today’s taxis, and voiture
de remise that corresponds to hire car with driver. These are known as ,Private Hire Vehicle (PHV) in England, or livery in the USA, or hackney
in Ireland, or remise in Argentina and mietwagen in Germany. The
voiture de place was the only one allowed to wait for clients on places(i.e. public squares) and streets. The voiture de remise had to wait inremises (i.e. garages) until being contracted by a client to go and pickhim up. For the voiture de place prices and quantities were regulated forthe reasons explained above, for the voiture de remise, this was left tothe free interaction of supply and demand. Customers needing a ride ina voiture de remise knew by experience the price and the quality ofservice provided by the remises in their neighbourhood just like we are3

aware of the price and the quality of the bread sold by ourneighbourhood bakers. They just had to go to the remise they preferredor send their butler to rent the service.

14.
Regulators everywhere faced a difficulty in the 1960’s when it
became easy to equip cars with two-ways radios and whensimultaneously households’ access to the telephone became
widespread. No more need to go to the garage to hire a car with adriver, this could be done by a simple phone call to a radio dispatch
centre that would send a chauffeur. Both taxis and hire cars withdrivers claimed exclusive access to this new market.

15.
Regulators reacted very differently in different cities. In New
York City, the Taxi and Limousine Commission prohibited the use ofradio by the yellow cabs and made it a monopoly of the liveries. In Paristhe opposite happened, voitures de remise were prohibited to use theradio, thus giving a monopoly to the taxis. Further more, the ministry ofInterior made sure the voiture de remise would disappear by stopping
issuing new licences. In London, the regulators let both taxis andprivate hire vehicles compete in the telephone booking market despite
taxi protests. However in all cases, the taxis retained the monopoly they
enjoyed in the street-hail market

16.
By permitting “e-hailing”, mobile apps now completely blur the
economic distinction between taxis and hire cars with drivers. And taxis
over the world are asking regulators to grant them a monopoly use of ehailing. In pure economics grounds this claim has no justification, this is
the reason why some regulators are reluctant to oblige.
17.
In the rest of this paper, we will distinguish two types of private
for-hire transportation services: (i) the taxis, and (ii) the hire cars withdrivers services we will refer to by their British abbreviation: PHV.

A new actor

18.
Although most of the radio-taxi dispatch centres appeared half acentury ago, unlike Denmark or Sweden, very few countries had specificlegislation to regulate their activity. One reason is that most of thesecentres were not independent operators but merely branches of taxi
firms or taxi cooperatives, and their activities usually fell in the taxi
operators’ legal framework.

19.
The penetration of smartphone app-based platforms called theregulator’s attention to this neglected part of the business, as
exemplified by one of the major recommendations of an important
study commissioned by the Danish Ministry of Transport [2013]: “Astronger role is being given to the booking offices, which makes them astrong and central actor (agent) in the future regulation, this including
in relation to development of technology, fair service all over thecountry and to secure that a less regulated (controlled) market will notlead to unstable circumstances on this market.”4The new actor’s name20.
The first task for the regulator is to define this new business andgive it a name.

21.
In its first rulemaking, the California Public Utilities Commission
referred to these companies as New Online-Enabled Transportation
Services (NOETS). It soon changed the acronym to Transportation
Network Company (TNC) for “ease of use” [CPUC, 2013, p.2]. Several
states followed suit and it is the term “TNC” that now seems to prevail
all over the USA with the notable exception of New York city where theTaxi and Limousine Commission coined the expression “Dispatch
Service Provider”.
22.
In France, the recent “Loi Thévenoud” created a new category
called intermédiaire that encompasses both the app-based platforms
and the traditional telephone call and dispatch centres.

23.
Similarly, in Switzerland, a proposed legislation 2 for the Geneva
County created diffuseur de courses a new category besides the twocategories of taxis and PHVs, encompassing all intermediaries thatconnect customers and drivers.

24.
In England where PHV vehicles, PHV drivers and PHV operators
are licenced separately, the Law Commission [2014, p. 46]
recommended to replace the term “operator” by “dispatcher”. Under
current law, private hire operators are defined very widely: “operate”
means “in the course of business to make provision for the invitation or
acceptance of bookings for a private hire vehicle”. The breadth of thecurrent definition has created numerous grey areas, as there is a lack ofclarity over whether some services should be licensed. For the Law
Commission, “The operator definition should therefore be narrower
than the current definition to identify more accurately the function
which needs to be regulated. It will now relate solely to the act of
dispatching a driver and vehicle to carry out the regulated activity” andbe called “dispatcher”.
25.
However, for the Law Commission [2013, p.43], this does not
apply to what in the UK is referred to in the trade as “radio circuits”, i.e.,
third parties inviting, accepting or making provision specifically for taxi
bookings. According to the Law Commission, the reason is that “radio
circuits have much less control over their fleet, as taxi drivers are free
to take bookings independently and pick up off the street. Customers
could contact a taxi driver directly without breaking any legal
requirement. When a radio circuit dispatches a vehicle it is therefore
doing no more than passengers could do themselves and thus acting asan agent”.

2 Une nouvelle loi sur les taxis et véhicules de transport avec chauffeur pour Genève,

Communiqué de presse du département de la sécurité et de l’économie République etCanton de Genève, le 27 août 2015

5

Why regulation is still necessary
Lexicology
26.
In French as in Spanish it is possible to distinguish between
réglementation and régulation. The first one being a set of rules andlaws, the second one being a mechanism to ensure the smooth runningof a system. In the presence of market failures, régulation, that theWorld Bank translates by “economic regulation”, is used to control
supply prices and quantities, as it is the case in the traditional taxi
market.

27.
This distinction helps to explain why “deregulation” generally
entails an abundant production of new rules, the rules that are required
to foster competition (and incidentally provide lawyers with abonanza). This is well exemplified by the experience of the American
Airline Deregulation Act of 1978.
28.
If the rationale for taxicab economic regulation has largely been
pushed to irrelevance by the emergence of the app-based on-demandride services, this does not mean that regulation (in the sense of
réglementation) is no longer necessary, much to the contrary.
29.
The first reason is that many countries still lack the appropriate
regulatory framework to help develop an efficient PHV industry
without unnecessary and burdensome requirements. The second
reason is that the app-based on-demand ride services require specificrules to ensure that their inexorable development will not be biased bymarket failures or deflected by entrenched interest groups.

30.
All too often the regulatory framework regarding PHV
operations has been designed to hinder their development and to
shelter taxis from competition as it has been the case in Germany, in
Belgium, in Italy or in France (see box: heading the wrong direction: theFrench case”).

How the Mayor of London came to regulate PHVs

31.
After several decades of laissez-faire and several incidents that
prompted public outcry, London started to set up a thorough legal
framework for PHV operations.

32.
Before the 60s, with the exception of the taxis, the English laws
do not distinguish the private for-hire transportation services fromother businesses. But with the arrival of the telephone in every home,
this business grew rapidly. The PHVs in England and Wales havetherefore been incorporated into the Local Government Act 1976 3. Thislaw does not apply in London, which enjoyed a special status.

33.
The 1976 Act distinguishes between vehicles, drivers andoperators. The law requires operators, drivers and vehicles to belicensed separately. It also requires operators to hold different registers(such as a logbook of trips, drivers and vehicles) to facilitate
supervision of the activity by the administration. However, it leaves it tolocal authorities to decide whether the use of the taximeter is allowed
3 Local Government (Miscellaneous Provisions) Act 1976, Part II.

6or not [§71-1], and for distinctive signs or advertisements on the body[§48-2]. Contrary to France, there are no restrictions for PHVs parking
in the streets waiting for assignments. Whether cruising in the street or
curbside parking with or without driver at the wheel, the PHV isconsidered like any other car in the street and submitted to the same
rules. What is prohibited, however, is touting nearby places of highdemand for taxi rides.
34.
These rules did not apply to London PHVs colloquially known as
minicabs, which continued to operate without license but whosebusiness was growing just as quickly as in the rest of the country. It wasestimated in 1998 that there were between 50,000 and 60,000
minicabs in London. This development without rules or control
episodically fuelled tabloid columns with numerous cases of drivers
assaulting passengers and even committing rapes. These attacks were
the fact of independent drivers. To distinguish themselves, small
businesses were created with a few dozen cars to occupy particularniches as “GreenTomato cars” for customers wishing to travel inecological cars (Toyota Prius), or the “Pink Ladies”, pink Renault
Kangoo driven by women, for women by subscription.

35.
London professional associations insisted that the activities ofabiding minicabs operators and drivers should be clearly distinguishedfrom the activities of those who practiced touting or operated inhazardous conditions.
36.
On the occasion of the creation of Greater London and its firstelected mayor, all passenger transport came under the control ofTransport for London (TfL), a public authority created in 2000 by the1999 Greater London Authority Act. TfL inherited from theMetropolitan Police the Public Carriage Office in charge of supervising
the Taxis. The management of both taxi and PHV is now ensured within
TfL by the 150 officials of the London Taxi and Private Hire (LTPH)
office.

37.
To meet the demands of professional associations, PHVs
operator licenses were introduced in London in 2001, but it was not
until 2004 that the legislation fully came into force. The regime isbroadly similar to the rest of England and Wales, with the samerequirement that operators, drivers and vehicles be licensed separately.
London regulation is however a bit more demanding regarding thetechnical condition of vehicles.

The three levels of regulation: car, driver, operator

38.
As stated by TfL in its general guidance for licensed PHV
operators [2011a, p. 1], “the purpose of regulation is to give passengers
confidence when using a licensed PHV operator that they are dealing
with a regulated, professional organisation with honest drivers and safe
vehicles.” For this purpose, regulation must address the threecomponents of the service, i.e. the vehicle, its driver and the operator.
The easiest way to enforce regulation is licencing.
7The vehicle
39.
The licensing authority must be satisfied that the vehicle issuitable in type, size and design for use as a PHV. It must be safe,
comfortable and in a suitable mechanical condition. Any active or
passive safety system designed to lessen the risk of injury or death in an
accident, such as airbags, seatbelt tensioner etc., must be in goodworking order.

40.
Depending on the local context, vehicle age requirements could
be imposed. The age of a vehicle is determined by the manufacturer’s
model year, regardless of when the vehicle was purchased or put into
service. In Portland Oregon, no vehicle older than 10 years is allowed tooperate as a TNC Vehicle. In New York City, “Black Cars” must be lessthan 5 years old. One drawback of these requirements is that they may
bar operators that would wish to provide transportation in vintage
cars. In Denmark special provisions exist for special occasion cars e.g.
for weddings.

41.
More importantly, the vehicle must be inspected periodically toensure that it conforms to regulations governing safety and emissions
standards. Since these vehicles generally are in constant use, these
inspections should be more frequent than the ones imposed on othervehicles, i.e. at least every year or even every 6 months.

42.
In several countries like France and England, regulations
specifically exclude from PHV licensing any vehicle that has externalsignage or advertising. The purpose of these regulations is to prevent
PHVs from picking up street hails and to confine them to pre-booked
fares; in other words to protect the legal monopoly granted to the taxis.
If we agree with the observation stated in the first section of this paperthat the economic justifications for this monopoly have disappeared,
there is no longer any reason to prevent PHVs from being identifiablefrom the pavement.

The driver43.
The qualification requirements for the drivers is a very muchdebated and politically sensitive issue. Here again, one must be very
careful to distinguish between what is useful for the riders’ safety andwhat is more targeted to prevent PHVs to compete with the taxis as
exemplified in the French case (see box: “heading the wrong direction:
the French case”).

44.
As stated above, it is mainly passengers’ safety concern with PHV
drivers that compelled London’s mayor to regulate the industry. The
regulation that came out of this process could be considered as abenchmark. As stated in its General Guidance for licensed PHV drivers[2011b], TfL may refuse to grant a PHV driver’s licence if the “applicant
fails to satisfy TfL that: he is at least 21 years of age; he has held a full
driving licence for at least 3 years, and; he is of good character and is fit
to act as a PHV driver.”45.
The criterion for “good character” is determined mainly on theapplicant’s conviction history (which is regarded as relevant to theapplication by the Licensing Authority) derived from the Enhanced8

Criminal Records Bureau report and other such reports, including
police observations and entries made in his Driver and Vehicle
Licensing Agency-issued driving licence.

46.
In our opinion, it is important that this vetting should be carriedout by government agencies with direct access to the Criminal Records
Bureau reports, and not left to the PHV operators.

47.
As noted during the recent IATR Annual Conference 4, in the USA,
new Transportation Network Company (TNC) laws allow them to selfpolice and conduct their own criminal conviction history checks. Thissuggests a poor understanding the nature, scope and breadth ofcriminal background checks. Some conflict of interest may also arise
when TNCs compete between themselves for enrolling new drivers. In
France, the now ceased UberPop was asking its applicant drivers tosend a copy of their casier judiciaire they could get from the ministry ofJustice, although falsifying these copies was an obvious option forcandidates that had convictions to hide.

48.
In TfL’s regulation, to be “fit to act as a PHV driver” includes
medical fitness. In this respect TfL has regard to the higher medical
standard applicable for drivers of passenger-carrying vehicles.

49.
There should also be some concern about maximum daily hoursof driving, although this is difficult to control if the driver is working fordifferent operators. For example, Portland regulation states that no
person may provide private for-hire transportation after engaging in
more than 14 hours of commercial activity in any given 24-hour period.
It however does not mention how to enforce this limit. We will comeback to this issue further in the text.

The operator

50.
The PHV operator is the person with whom the passenger books
the journey. According to the Law Commission [2014, p.43] there is a
key rationale for licensing private hire operators: they play animportant role in enforcing private hire licensing requirements. They
can only dispatch appropriately licensed vehicles and drivers, and there
needs to be an incentive for them to ensure that regulatory
requirements are met. In a regime of licensing this incentive isheightened by the fact that an operator’s entire business operation
could be affected by a failure to ensure compliance. Their role also
provides a helpful economy of scale for those charged with
enforcement: as we will see further below, through operators, licensing
officers have access to the details of numerous drivers, vehicles and thejobs they have undertaken.

51.
In London, the PHV operator regulation states that it “has a legal
responsibility to keep records of the drivers’ licences, insurance, cardetails and will know when it is due for [periodical vehicle inspection].
The operator must also keep proper records of journey bookings, who
undertook them and any quoted fare.”
4 International Association of Transportation Regulators (IATR)'s 28th Annual

Conference in Montreal, September 27-30.

952.
A similar stance was taken by the New York City Taxi andLimousine Commission (TLC), and pushed a step further, when it
recently updated its rules. There are three classes of PHV service in
New York City: Community Cars (aka Liveries), Black Cars, and Luxury
Limousines. All must be booked through a “base”. There are some 500
such bases licenced in the city. The new rules require these bases tosubmit trip records electronically to the TLC on a regular basis (§59B19 of the TLC Rules). Previously, like in London, bases were justrequired to maintain dispatch trip records but were not required toprovide them to the TLC on a regular basis.

53.
Contrary to London where app-base dispatchers are justconsidered as another operator and submitted to the same rules, theTLC chose to introduce a new category of license for these companies
referred to as Dispatch Service Provider (DSP). These are not allowed tobook PHV drivers directly; they must do it through the PHV “bases”.

54.
Actually, the TLC takes full advantage of the ICT 5 capabilities ofthese companies by mining the data they collect to improve safety,
accountability, and policymaking. Indeed, the new regulation compels
them to provide, for each trip booked, detailed data according to thefollowing entries:• The dispatching base licence number• The pickup date and time
• The driver’s TLC license number• The vehicle license plate• The pickup and drop off location names (i.e. postal address)• The pickup and drop off longitudes• The pickup and drop off latitudes

55.
Besides providing the city officials with a wealth of information
they could use for planning purposes, these data can be used to check if
drivers overwork beyond legal time or to check taxation compliance.

56.
This can be a very important feature of the regulation, especiallyin Europe where the welfare state is by and large financed by taxes on
employment and on value added, and where consequently, incentives
for tax evasion and undeclared work are substantial.

Regulating the use of public space

57.
As we have seen in the first section of this paper, one of thejustifications for capping the taxi fleet is the congestion of public roads
and public places that would be caused by an unrestrained number oftaxis.

58.
There is an on-going debate, not yet sufficiently documented bygenuine research, on whether or not PHVs contribute to congestion andshould therefore be restricted in numbers. Some argue that they reduce
household car use (and ownership) and empty parking lots, others that,being an alternative to mass transit, they only add more cars in the
5 information and communication technologies

10streets. A recent research [6-t, 2015, pp. 132 & 143] seems tosubstantiate the first hypothesis.

59.
In our opinion, congestion should be dealt with by congestion
pricing, not by fleet capping. It is interesting to note that the present
mayor of London wishes to cap the number of private hire vehicles
whose recent increase “has led to greater congestion in London, more
air pollution and more illegally parked cars“ [Financial Times, May 22,2015] when, at the same time, these are exempt from the London
congestion charge when undertaking private hire bookings for a
London licensed operator. Of course, the present London congestion
charge scheme is far from being economically optimal, but it is now
technologically possible to design a much more efficient system like theone proposed by Glaister & Graham [2003].

60.
The same goes with street parking. In the economists’ ideal
world, street parking should be priced at its opportunity cost. Although
it is now technically feasible, it is far from being the case anywhere. Oneof the closest systems is the Copenhagen parking meters that exhibit
different tariffs according to the time in the day. One of the worst
examples is given by Paris where street parking is significantly underpriced and where thousands of vehicles cruise around looking for an
empty space. But a very common feature of current street parking
policies is the special discounted rate granted to the city residents.
There is some injustice to freely (or nearly freely as in Paris) grant
public space to the residents that have a car when their neighbours
don’t.

61.
In many cities, bus lanes are open to taxis but not to PHVs. This
has no economic rationale, just like banning PHVs from diamond lanes 6
on highways when taxis are not. In our opinion, diamond lanes should
be replaced, where possible, by express toll lanes and all vehicles,
including taxis and busses, subject to the toll with no discount. The
more passengers in the vehicle, the lower the price per passenger.
62.
Many airports provide taxis with free parking space where they
may sometimes stay several hours waiting for their turn. Every day,several thousands of taxis are stationed at the Paris airports instead ofplying the Paris streets where they are in short supply.

63.
The taxis put the blame for this situation on the congestion that
occurs on the roads connecting the airports to the city. A moreconvincing explanation puts the blame on the sum of three components:(i) the rigidity of the taxi fare system that at certain times makes the
airport trips much too lucrative, (ii) the fact that this parking space isgranted for free despite its high opportunity cost and (iii) the taxis’ lackof real-time information about the market conditions elsewhere in thecity. It should be noted to this regard that the taxis that most oftenchoose to stay at the airport after a ride are the ones that are notaffiliated to a radio circuit.

64.
Could the same thing happen with PHVs? Probably not andcertainly not to that extent because they are never granted free parking,because their tariffs are more flexible and because they are aware of

6 also called High Occupancy Vehicles (HOV) lanes.

11market conditions everywhere. Of course, one can often spot PHVs
cruising around airports or parking in awkward places to avoid paying
the airport parking fee, but this could easily be policed, either on the
spot or by checking the data provided by the e-hailing platforms.

The fourth level of regulation

The danger with dominant Transportation Network Companies
65.
Some markets are prone to the emergence of “natural
monopolies”. The market for taxis booking by telephone is a perfect
example, illustrated in France by the G7 monopoly in Paris. A Parisian
who wants to call a taxi on the phone dials the G7 number because it is
the call and dispatch centre that connects by far the greatest number oftaxis. Symmetrically, a taxi would prefer to be affiliated to the G7 centre
because it is the one that receives the most calls from customers. Thereis no room for a competitor. Taxis Bleus, the only “competitor” to G7
actually belongs to the same “Rousselet” group.
66.
For the same reasons, the market for app-based booking is
conducive to natural monopoly, but this time on a global scale.
Investors have understood that, as they valued Uber at over $50 billion
while corporate profits are insignificant in relation to that sum.
67.
To enjoy a natural monopoly position in an emerging market, itis necessary to very soon acquire a dominant share of that market. Uberis one of the world’s dominant transportation network companies andto acquire this natural monopoly its strategy plays on two scales: thescale of the city and across the globe.

68.
At the city level, as in the case of G7 for taxi booking by phone,
the customer favours the application that displays the greatest selectionof vehicles around him with the shortest waiting time. And
symmetrically, to minimize down time between fares, drivers will
choose to work for the application that has the largest number ofaffiliated clients.

69.
But unlike for taxi booking, mobile applications add a dimension
to the game of supply and demand: the price. While with taxis the priceis fixed and quality random, with mobile applications, the client will
select the application that offers him the best price for the quality of its
choice. Symmetrically, the driver owning a particular type of vehicle
will choose to work for the application that will charge him the lowest
commission on his income.

70.
Acquiring a dominant position in the market for app-based
booking thus implies attracting customers with low prices and with awide range of vehicles to choose from but at the same time to attract
many vehicle owners and drivers with high revenue prospects.

71.
In situations of cut-throat competition, gaining a dominantposition in the city may therefore entail selling at a loss for a given time
period, up to subsidising trips by giving the driver more than what theclient actually paid. This is what has been observed in several US cities
12where Uber applied this strategy to try to eliminate its competitor Lyft
from market 7.

72.
Once its natural monopoly position established, and no longer
fearing competition, the winner may charge the customer the price thatmaximizes its monopoly rent. Becoming the only buyer (whateconomists call a monopsony), it can also create competition between
the drivers to grant them only the lowest remuneration.

73.
In the long run, such a strategy is possible only if the losses in
the cities to be conquered can be offset by the rents enjoyed in the cities
where a monopoly position has already been won. It is here that themarket for matchmaking between drivers and customers by app-based
platforms is a natural monopoly on a global scale: the race to win
customers and drivers in the city is complemented by a race to conquer
cities and countries.
74.
Another factor contributing to make the app-based booking a
global natural monopoly is the rapid development of tourism andinternational mobility. Tourists represent a substantial part of the taxi
business in metropolises. The reason is simple: unfamiliar with thecomplexity of connections and tariffs of a foreign urban public
transport network, tourists often prefer to rely on the taxi driver. But
this option is often crossed with mistrust: won’t the driver take theopportunity to make detours or charge undue extras? Just as with
McDonald’s hamburgers, the wary tourist will use the app he is familiar
with in his home country, the one that is already downloaded in his
smartphone. No room for local apps.

75.
The reason why economists dislike monopolies is that they havethe power to maximize their rent to the expense of both theircustomers and their suppliers and to restrain their production below
what customers would be willing to pay for. If unchecked, thedevelopment of an app-base booking platform will lead to natural
monopoly and become a threat to drivers, to customers and somehoweven to governments. The main threat for both drivers and customers
comes from the fact that once in a monopoly position, the platform will
set the percentage commission it takes on each trip at a level that will
maximize its net revenue, i.e. its rent. This translates into higher fares
to the riders and lower revenue to the drivers.

Threats to drivers

76.
For the moment, PHV drivers are happy with their apps. Veryoften they work with more than one at the same time. Since all of thesee-hailing platforms are currently in a phase when they are competing to
attract more drivers, the conditions they propose to their potential
drivers are attractive, particularly for the unemployed or for the people
who have spare time.
77.
However, PHV driver, like taxi driver is a low skills job. Once thee-hailing platform has reached a monopoly position in the city, it
becomes a monopsony buyer of driving services. As exemplified by theworking conditions of the yellow cab drivers in New York City, or the
7 Forbes, May 30th 2014, “How Uber And Lyft Are Trying To Kill Each Other”

13

locataires in Paris who rent the taxi licence from its owner, these low
skill workers have to accept low pay and stressing workload.

Threats to customers

78.
The same goes for customers. For the moment, they have thechoice between competing apps. They can compare prices and service
conditions and choose what suits them best when booking a trip.
Although it has sometimes been said that most customers are reluctant
to carry too many different apps in their smartphones and often stick to
the one they are used to, the fact that even a small portion of customers
use a different app is sufficient to ensure competition. If the value formoney between apps widens too much, even the most loyal customers
will switch to the better one.
79.
This option disappears when one provider has won a monopoly
position. Although a clever monopoly will always allow some dummycompetitors to survive in some minor segment of the market tomaintain the illusion of choice, customer as a group will be charged
higher prices than in a really competitive market.

Threats to government

80.
By taking its customers and its drivers as hostages, themonopolistic operator could even blackmail the local governments toshelve projects that might hurt its monopoly profits.

A possible solution

81.
The problem is that whereas regulating a natural monopoly that
could appear at the city or the country level, as it is the case with theradio-taxi dispatch centres, is rather straightforward and within reachof the local governments, it is much harder when the potential
monopoly crosses several country boundaries as it is the case with
TNC’s like Uber and other international players that are emerging inthis market..
82.
Solutions exist however, but they require the local regulator tohave access to some of the data produced by the apps platforms.
However this is not too farfetched since the London regulator has
already, by law, access to all the necessary data and since access to Uberdata is part of the recent deal reached between Uber and the mayor of
New York City.

83.
In August 2000 the British Office of Fair Trading prevented
Transdev, a French company, from buying GoAhead, one of its
competitors, because that would have given it control over 28% of the
London bus transport supply. Similarly, the Swedish laws 8 prevent
Stockholm city taxi call centres from supplying more than 35% of themarket. In both cases the supply is measured in terms of vehicle fleet.

84.
In the case of app-based ride booking platforms, such a metric is
not possible since the vehicles are not fully controlled by the platform.
Some vehicles and some drivers may only work part time with the
8 Konkurrenslag (2008:579) & Lag (2008:580) om gruppundantag för

konkurrensbegränsande avtal om viss taxisamverkan

14platform. However, measuring the market share in terms of revenue orin terms of rides is much easier if the platforms are required to submit
detailed trip records electronically to the regulating authority as wehave seen in the case of New York City.

85.
Two policy instruments are then practicable: fixed quotas orprogressive taxation of market share. The first instrument isstraightforward. It could however lead to a cartel where theincumbents could collude to prevent new contenders to enter themarket. Progressive taxation of market share may be more flexible.
86.
Mexico City is an example of proportional (not progressive)
market share taxation. The city, in July 2015, became the first Latin
American city to regulate ride-hailing apps, introducing a 1.5 per centride levy 9. In New York City, to close a standoff with the municipality,
Uber agreed last summer to discuss measures such as a surcharge oneach fare to help fund the cash-strapped Metropolitan Transit
Authority.

87.
To prevent TNCs from getting a dominant position in the market,
the progressive surcharge should reach punishing rates when themarket share gets close to, say, 40% or 45%.

Conclusion

88.
By focusing on the “principles” for regulating for-hire roadpassenger transportation services, we took the easy stance and were
careful not to wonder about the political feasibility of ourrecommendations. This feasibility varies very much from one country
to the other and between cities within the same countries.

89.
For nearly four centuries, taxicab regulation was justified by
two market failures that largely disappeared with the advent ofsmartphones. However, the fact that taxicab regulations were renderedobsolete does not mean that the for-hire road passenger transportation
services do not need to be regulated, much to the contrary. There mustfirst be regulations regarding the vehicles, the drivers and theoperators. The principles underlying most of these regulations are now
well established, drawing on the experience of cities like London.

90.
But the smartphone revolution brought a new actor in the field:
the app-based platform that dispatches drivers to the potential riders.
91.
Although some of these firms present themselves as a mere
market place that allows buyers, i.e. passengers, and sellers, i.e. drivers,
to meet, the truth is quite different. The “equilibrium” prices are in fact
set by the platform with a wide propensity to manipulation, as recent
price wars have demonstrated.

92.
It is our opinion that this new market is prone to natural
monopolies. We have shown some of the potential drawback of thesemonopolies and proposed some policy tools to prevent theiremergence. Some of our recommendation may seem farfetched and9 At this date, Uber had 500,000 users and more than 10,000 drivers in Mexico City,

with most using Uber X the equivalent of Uberpop in Europe.

15

much too premature. We believe that it is easier to implement them
now that they still have little bearing. It will give time to adjust them toa situation that is rapidly evolving.

Box - Heading the wrong direction: the French case93.
The French regulation of TNC is the end result of a decades-longfight between the ministry of the Interior (the Police) in charge of thetaxis and the now nearly extinct voiture de remise on the one hand, andthe ministry of Finance, in charge of the economic policies on the other
hand.
94.
Compared to all European countries, France has a singularity: it
benefits from five legally distinct types of private for-hiretransportation services: (i) the taxis, (ii) the passenger cars with driveror VTC, (iii) the nearly extinct voitures de petite remise, (iv) the“occasional” transport with fewer than nine seats but compelled tocarry at least two passengers and nicknamed LOTI, and the light
medical vehicles or VSL that share with the taxis the monopoly of
carrying seated patients. Each of these five sectors is corseted in an
overregulation primarily intended to fragment the market forprotecting economic rents.

95.
In 1955, a decree reactivated an old distinction between voituresde petite remise and voitures de grande remise. According to the decree,
the latter are “luxury cars, driven by the owner or his agent, according
to the conditions set in advance between the parties. They must be of a
recent model and offer passengers conditions of comfort and interior
amenities, horse power and speed demanded by internationalcustomers.” Unlike voitures de petite remise that, just like the taxis, arecontrolled by the ministry of the Interior, the voitures de grande remisefell under the ministry of Public Works-Transport-and-Tourism. A
decree of 1990 specified the characteristics of the vehicles to be used
for grande remise services: “4 doors and 5 seating capacity minimum,
fiscal power 10 of at least 9 HP for gasoline engines and 6 HP at least fordiesel engines, a minimum overall length of 4.50 meters and aminimum overall width of 1.70 meters.” To our knowledge, few
jurisdictions in the world care to explain in such details, to private
contractors, the tastes and expectations of their international clientele.

96.
The coexistence of these three specific types of for-hirepassenger transport, i.e.: the taxi, the voitures de petite remise and thevoitures de grande remise has not been an issue until the early 70s whenhouseholds’ access to the telephone became widespread. With thephone, it was no longer needed to go and fetch these cars in their
garages, a phone call was enough to book a ride. Everywhere in theworld taxis have seen the danger of this new competition, andprotested against the rapid development of the PHVs, but in France
they were particularly well heard.
10 Although measured in “horses”, the fiscal power only has a very distant connection

to actual Horse Power (HP)

16

97.
Indeed, for over 30 years, successive ministers of the Interior
strived to make the petite remise virtually disappear, ordering theirprefects not to grant any new licenses. In 1993, a circular from theminister of Interior to the prefects ordered them, in a niceunderstatement, “not to extend excessively the number of petite remise
operators as to maintain the fragile balance with taxi operators.”
Because, unlike the taxis’, these licenses are non-tradable and nontransferable, the latter administrative act, not only definitively froze theexpansion of petite remise, but it guaranteed their eventual
disappearance. The taxis got what they asked for. In Paris the petite
remise totally disappeared and there are very few left in the rest of thecountry.
98.
Meanwhile the owners of taxis licences managed to prevent
most local governments to issue more taxi licences as a way to enhance
the market value of their property.

99.
The 1982 law on inland transport gave an opportunity to someshrewd entrepreneurs to fill part of this void by subverting a section of
the law originally devoted to regulate occasional collective
transportation in small buses. They realised that “collective” starts withtwo passengers. Of course there were other constraints but the“occasional transport” strived in several niches like airport trips where
they competed directly with the taxis.

100. In an other sector, the paucity of transport supply for seatedpatient led the legislature to create the Light Sanitary Vehicle (VSL) to
share the monopoly the taxis enjoyed in this market.

101. Several economists have since recommended to release thepetite remise. It was, for example, the “Decision 210” of the Attali reportcommissioned by Nicolas Sarkozy in 2008. But after three days of taxi
protests in several cities in France, the government quickly buried this
proposal of the Attali report.

102. However the story does not end there. In May 2007 a Decree
concerning the composition of the first Fillon government created theministry of Ecology-Sustainable-Development-Transport-and-Housing.
By this Decree, the Tourism Directorate previously attached to theministry of Transport-Infrastructure-Tourism-and-the-Sea wasentrusted to the ministry of Economy-Industry-and-Employment,
which was itself attached to the ministry of Finance. Two years later, bychanging a few paragraphs in the thick Tourism Code, the voitures degrande remise regulations were “modernized” by taking the new name“passenger car with driver or VTC”. This reform entered into force on 1
January 2010 in accordance with a December 2009 Decree
implementing the law of development and modernization of tourism
services.

103. These texts have largely altered the for-hire passenger transport
sector by simplifying access to the profession. Companies are no longer
compelled to own themselves the vehicle licenses, and subject toquantitative limits related to the number of cars that could be operated
by the contractor. But above all, the requirements on the vehicles havebeen revised downwards: the minimum number of seats was reduced
from five to four, the minimum length from 4.5 m to 4.4 m and vehicle
17

power requirements have been deleted. Although very discreet, thisreform has not gone unnoticed, and the sector has been expanding
rapidly.

104. Thus, by a clever conjuring trick, the legislator had resurrected aform of petite remise, but a petite remise out of reach of the Minister of
the Interior, and a petite remise rid of the obstacles which, in 1977, hadbeen put to its activity as the ban on wearing of distinctive signs on the
car body or the obligation to return to its base (remise) after each trip.
This encroachment of the ministry of Finance in the reserved area ofthe ministry of the Interior probably did not happen inadvertently.
Indeed, in 2008, economists from the Directorate General of theTreasury had measured the correlation between the taxi shortage inprovincial towns and the market value of the licenses. For this study, itworth noting that the researchers did not have access to internal taxi
statistics of the ministry of the Interior, and they had to be content withpublished statistics, already several years old.

105. In August 2010, in his written question to the Secretary of State
for Trade, MP Philippe Vigier noted that since the entry into force of thelaw, 267 companies had already registered under this new regime, andemphasized the fear of the National Federation of Artisans du Taxi, themajor French taxi union à that time “that access to that profession
constraints are insufficient to guarantee professionalism and safety andthat the field of activity of these companies includes transport
traditionally provided by taxis and is not limited solely to tourism.” A
year later, the number of VTC operators approached 2000 according to
the Register of VTC, half of them in the Paris region. But this figure
probably underestimated the sector's importance largely because it
does not give the number of vehicles, given that some operators haveseveral dozen vehicles.

106. According to the original decree, any person or company wishing
to exercise this activity must be recorded in a register. Registration is
granted by a license committee. The operator of VTC must attach to his
application for registration an estimate of the number of drivers andthe number of passenger cars envisioned for the exercise of its activity.
But once the licence is granted, it is not necessary to declare the actual
fleet, nor the actual number of drivers. There are therefore no statistics
on the existing VTC fleet. The authorization must be renewed every
three years.

107. Drivers must hold a professional certificate. To obtain it, theymust show evidence of a professional training, including a theoreticalpart (transport regulations and the highway code, customer relations,general education concepts, foreign language) and a practical part(driving courses and, where appropriate, first aid training). The
principle of this course, claimed by taxicab unions, was finally acceptedby the Tourism Directorate and by the prime minister who initially did
not felt it necessary.
108. In medium-sized cities, the competition provided by the VTC
presented a real danger for the taxis. And their reaction was verystrong, as evidenced the case of Easy Take in Avignon. This
entrepreneur, who circulated thirty Renault Kangoo, offered18

“unbeatable and no surprises” fixed prices: 7€ up to 7 km, 15€ up to 15
km etc., day and night, seven days a week without extra for luggage. The
start was thundering: vehicles with bright colours, aggressive
advertising campaign ... [Le Monde, 19.05.2011]. The taxi union of
Vaucluse seized justice to summon Easy Take to cease its trade,accusing it, bailiffs findings supporting, of unfair competition, andseveral hundreds taxis protested in the southern cities of France where
Easy Take was starting to expand its business.
109. It seems that once again the taxis were heard. Indeed, each year,
on the anniversary of the first decree which fixed vehicle
characteristics, a new decree cranks up these characteristics backcloser to those that were imposed on the voitures de grande remise, firstby returning to the length of 4.5 m, then by requiring a minimum outputof 88 kilowatts or 120 horsepower. Bad news for the colourful but too
short Kangoos and for Easy Take that went bankrupt.

110. But the taxis were not satisfied as the advent of app-based
booking platforms gave the VTC a new push. With taxi demonstrations
turning violent, in December 2013 the government tried to stymie ehailing by imposing a 15 minutes delay between accepting a booking
and picking up the passenger (the taxi unions had asked for two hours)
overriding a negative advice the Autorité de la Concurrence had given
to the government’s project a couple weeks before.
111. A few months later the Conseil d'État suspended the decree andeventually cancelled it by the end of 2014.

112. Meanwhile in February 2014, the government had entrusted the
MP Thomas Thévenoud the task to establish “sustainable conditions forbalanced competition between individual modes of passenger
transport.” The law that was enacted during the following summer
exhibits a curious balance.
113. There are first the articles that open the way to decrees that willdefine the “conditions of professional competence” required from the
VTC drivers and “technical conditions and comfort” to be met by thevehicles. As if the administration had to decide the comfort expected byclients of the VTC. Sure enough the decrees that followed confirmed the4.50 m minimum length for vehicles and the 88 kilowatts minimum
power, while other decrees have raised the level of training required for
drivers to 250 hours courses. Since these training courses are notculminating in an examination, their purpose is obvious: create abarrier to entry for the unemployed who cannot afford the some 5000 €price tag of these courses. There are no courses imposed to applicantstaxi drivers, only an entrance examination.
114. Then there are the articles designed to make the VTC lesscompetitive by increasing their economic (and incidentallyenvironmental) operating costs, by requiring, for example, that they
return immediately after each fare to the operator’s premises or inside
an underground car park (where, as everyone knows, the mobile phone
network works only imperfectly).

115. Finally, there are items that are banning what is the very essenceof booking applications by prohibiting VTC “and the intermediaries that19

they use, informing a customer before booking / ... /, regardless of themeans used, both of the location and of the availability, immediate or
future of a vehicle / ... / when this vehicle is on a public road".

116. Recent research [Péran, 2015] has shown that, unlike the New
York taxi medallions which price fell by some 50% in the past two
years 11, the price of the Paris taxi licences has remained remarkably
stable over the last three years. The French taxis could be thankful to
Mr. Thévenoud.

References

6-t [2015] Private hire services Survey of users of the Uber application,
Study conducted by 6t-bureau de recherche for Uber, September 2015,
212 p.
CPUC [2013] Decision adopting rules and regulations to protect public
safety while allowing new entrants to the transportation industry, The
Public Utilities Commission of the State of California, 9/19/2013 Item39, 76 p.
Danmark Transportministeriet, Betænkning fra udvalg om erhvervsmæssig
befordring i personbiler , October 2013, 293 p.
Fernández L., J. Enrique, Joaquín De Cea Ch, Julio Briones M., A
diagrammatic analysis of the market for cruising taxis, Transportation
Research Part E: Logistics and Transportation Review, Volume 42,
Issue 6, November 2006, Pages 498-526, ISSN 1366-5545
Glaister, Stephen and Dan Graham [2003] Transport Pricing andInvestment in England, Technical Report, Research commissioned by
the Independent Transport Commission, Department of Civil
Engineering, Imperial College London, 31 May 2003
Jonathan V. Hall and Alan B. Krueger [2015] An Analysis of the Labor
Market for Uber’s Driver-Partners in the United States, Uber, Jan.
2015, 29 p.
Péran, Ludovic [2015] Impact assessment of the entrance of Uber on theparisian taxi market, Paris School of Economics Master thesis, to be
published.
TfL [2011a], Abstract of Laws - General guidance on private hire vehicle
law for London’s licensed private hire vehicle operators, Transportfor London, London Taxi and Private Hire (LTPH), June 2011, 15 p.
TfL [2011b], Abstract of Laws - General guidance on private hire vehicle
law for London’s licensed private hire vehicle drivers, Transport for
London, London Taxi and Private Hire (LTPH), April 2011, 13 p.
The Law Commission [2014], Taxi and private hire services (LAW COM
No 347), Her Majesty’s Stationery Office, May 2014, 280 p.

11 Bloomberg “The Struggles of New York City’s Taxi King”, August 27, 2015 -http://nycitycab.com/business/taximedallionlist.aspx

20

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