The Reaction of Competition Law to Uber

An assessment of the London taxi and minicab industry: the reaction of competition law to Uber.

On the 11^th of June 2014, London was brought to a standstill. Black cab drivers participated in a protest organised by the Licensed Taxi Drivers Association (LTDA) that left key routes of the capital city in gridlock.[1] The protest was designed to draw the city’s attention toward black cab drivers’ dissatisfaction with Transport for London’s (TfL) ‘failure [to] act against the minicab app Uber’[2].  Uber is a licensed private hire vehicle operator that allows customers to book a private hire vehicle (PHV) through an app downloaded to their smartphone[3]. The black cab drivers allege that the smartphone app used in Uber cars constitutes a ‘taximeter’, and thus the London taxi licensing authority (TfL) is allowing Uber to evade relevant licensing law. As Uber is in possession of a PHV licence, rather than a taxi licence, they are not permitted to equip their vehicles with taximeters[4], as only taxis are permitted to be fitted with taximeters in London[5]. TFL have asked for a High Court decision as to the taxonomy of the Uber app[6], in order to establish whether the licensing regime has been breached, before taking any action.

Whilst references to competition have been cited in a few press releases covering differing angles of this ongoing debate, no party directly involved has yet raised competition law as a method of resolve. This essay argues that competition law offers a comprehensive analysis of the issue at hand; achieving a superior and non-transient outcome that cannot be achieved if the challenge is restricted to the categorisation of the Uber app. This essay critiques the current legislative framework that determines the taxi and PHV regulatory regime in London [7] from a competition law perspective.  It is concluded that the hindrance to free competition imposed by the current framework is not proportionate to the objective of ensuring the lawful exercise of the taxi profession.  A High Court finding that the Uber app  is or is not a ‘taximeter’ will merely avoid addressing the true legal issue, being that reform is needed to ensure a new, level playing field for all participants and entrants to the London taxi and PHV industry.[8]

The taxi and PHV industry in London exhibits characteristics suspect of a distorted competitive market. The cost to travel by taxi at any time is expensive[9], there exists not a great deal of comparative choice and supply is limited. Anyone who has attempted to hail a taxi off the kerb in a busy London street will appreciate that consumers must use a black cab, source a PHV from a rank or take alternative transport altogether. Late at night and at the weekend demand for taxis is high whilst supply is very low[10], resulting in lengthy waiting times for consumers. Further to that, with the entrance of innovative competitor Uber, black cab drivers took to blocking off the roads around Trafalgar Square; perceived as a lobbying attempt to pressurise regulators into safeguarding taxis and keeping the market exactly the way it is.[11] A superficial determination of anti-competitive behaviour premised solely on the observance of dissatisfaction is not desirable. Still a deeper analysis of the market verifies that the aforementioned indicators exhibited are in fact consequences of an anti-competitive market.

Competition law systems are designed to produce efficiencies, which in turn maximise ‘welfare’.[12] Developments in European Union competition law[13] and United Kingdom (UK) competition law have established that consumer welfare is the standard by which an efficient competitive market will be gauged. Competition policies aim to prevent bullying and ganging up of players within markets[14] all in the interest of consumers. Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices, which may prevent, restrict or distort competition within the internal market.[15] A non-exhaustive list of such agreements is provided.[16]  It takes little effort to imagine that the detrimental effects of these practices would be felt by consumers[17]; in fact the European Commission has stated that the objective of Article 101 is to ensure agreements do not ‘restrict competition on the market to the detriment of consumers’.[18] Article 102 TFEU, which prohibits undertakings abusing a dominant position, makes a direct reference to consumer.[19] When applying Article 102, the Commission again states its focus is on conduct ‘most harmful to consumers’.[20] It is well established, in the whole rhetoric of the Commission, that consumer welfare is the standard to be applied.[21] Significant resemblance in substance and form exists between Article 101 and Article 102 TFEU and the UK competition law regime provided in Chapter I and II of the Competition Act 1998.[22] Furthermore, the Enterprise and Regulatory Reform Act 2013, which reforms the competition framework in the UK,[23] states that promoting competition is to be for the benefit of consumers.[24] The harm to consumer welfare will therefore be the standard to which current regulation, and the possible outcomes of the High Court decision, will be critiqued.[25]

The taxi and minicab industry in London is a highly regulated market.[26] Taxis (black cabs) and PHV’s (minicabs) are distinct services. Taximeters are exclusive to black cabs, which hold a legal monopoly over the ‘rank and hail’ market[27] and the ability to use bus lanes.[28] PHV’s must be booked via phone or at a rank; they cannot accept street hails, use bus lanes or be fitted with taximeters. Competition policy ‘must ensure that [any] regulatory environment fosters competitive markets’[29] but in the taxi and minicab industry this does not seem to be the case. The regulatory distinctions create two separate markets,[30] essentially ‘rank and hail’ and ‘pre-booked’ services. On the ‘rank and hail’ market, where the legal taxi monopoly exists, taxis and PHV’s do not compete. On the pre-booked market, taxis and PHV’s are substitutable[31] and compete with one another.[32] For many years black cabs have dominated both markets with little serious threat from private hire vehicle operators.[33] But technological advances have now revolutionised the way consumers engage with taxi and PHV services.[34]  Smart phone apps can seamlessly connect riders to drivers.[35] Consumers are not confined to either kerb hailing a cab or phoning to pre-book a car from a landline, consumers can use smartphone apps to immediately book an available cab in the vicinity. Now innovative PHV operators, such as Uber, present fierce and much needed competition for the taxi industry. But the current framework is outdated and if left unchanged, significantly hinders any competitors’ ability to restrain the powerful and protected taxis for the benefit of consumers. Regulators must act, using their greater technical market expertise relating to the sectors[36], to stop the market failings evidenced below.

The paying of a higher price for a service is the most likely effect of anti-competitive behaviour on consumers.[37] Although reviewed annually, public opinion is not considered when reconsidering fare tariffs[38] and the fare calculation methods have been the same for over thirty years.[39] Even with a fixed maximum fare[40], value for money is consistently the lowest scoring criterion in customer satisfaction surveys relating to taxi services.[41] This is unsurprising with the knowledge that the prescribed maximum fare is rarely discounted.[42] But, why would it be? This would come at a cost to an individual driver who has no real incentive to reduce the fare for a customer. A taxi driver responding to a hail is effectively a ‘temporary monopolist’.[43] A customer faced only with the prospect of waiting for another taxi is unlikely to refuse any fare offered to them by a taxi driver.[44] The maximum fare is prescribed across the whole taxi industry; drivers know that the next taxi will almost certainly charge the same high price. Taxi drivers have no need or motivation to set an independent price. This has resulted in the industry as a whole charging high prices, which consumers have been forced to pay. The costs which are heightened above what they would be at a competitive level are passed on to the consumer for the services in question, causing the consumer a detriment.[45] Effectively the taxi industry behaves as a ‘cartel’[46], transferring money from consumers to taxi drivers.

Similarly taxi drivers have done very little to increase production to meet the unmet demand for taxi services in the city. Standard taxi fares are increased at weekends and at night[47], and still this has not incentivised taxi drivers to combat customer dissatisfaction.[48] Taxi drivers know that if customers need a taxi they will wait; and regardless of the waiting time, faced with no better option, customers will continue to use taxis.[49] Consumers endure a poor quality, inefficient service because of the limited output.

The innovative device used in Uber cars calculates the journey charge in relation to the distance travelled in the time taken for the journey[50] and incorporates surge pricing for busy periods to ensure enough drivers are on the road when they are most needed.[51] Taxi drivers argue that the Uber app is a taximeter. As only taxis can be fitted with taximeters, classifying the Uber smartphone app as a taximeter would make their activity in London illegal. Precluding PHV’s to be fitted with taximeters is exclusive to London.[52] The perceived justification for this being that when a PHV is booked in advance, customers may desire a quote for the journey as a means of comparing prices between service providers.[53] It is feared that allowing taximeters to be used in PHV’s may deter PHV drivers from advance pricing, relying instead on the metered price.[54] However this is a weak rationale for preventing taximeters in PHV’s. The majority of minicab users do not shop around for a service provider[55] and are therefore in a weaker position to judge whether the price quoted is ‘fair’.[56] Uber has introduced new technology to the taxi and minicab industry which is efficient and produces cheaper services for consumers. Uber have brought competition to an industry that hasn’t evolved in years.[57] Classifying, or not classifying, the app as a ‘taximeter’ does not diffuse the issue at hand. The regulations should be changed to allow efficiency producing devices in PHV’s. Taxis will then be forced to utilise resources to better the service they provide, rather than deploying energy into socially wasteful protests.[58]

Ordinarily, a market where prices are extremely high and substitutes are lacking would be pressured into change by new entrants observant of the possibilities for profit. But attracting any new entrant is a particular challenge for the taxi industry[59] because the attraction and arrival of new competitors is nullified by a regulatory barrier to entry.[60] Anyone who wishes to obtain a taxi drivers licence must pass the Knowledge exam[61], ‘a series of rigorous, one-to-one, topographical examinations’[62]; the exam aims to ensure a quality understanding of London streets across the taxi industry. Completing the Knowledge exam is a time consuming process, taking an average of three and a half years.[63] It is renowned for its difficulty and high drop-out rate.[64] The delay to entry created by the exam is out of all proportion to its aims. In an age where GPS satellite navigation can find the quickest journey route in any city in seconds, knowing the streets of London by heart is unnecessary and acts merely as a bottle neck to supply.[65] In setting any criteria for the issue of licences authorities should simply concentrate on the safety and well-being of individuals using the service.[66] The Knowledge tests achieve an equivalent result to a quantity restriction[67] which is widely regarded as an unjustifiable restriction on competition.[68] Whilst a firm is able to enter the London taxi industry, given the length of time and expense to obtain driver’s licences, this is a highly doubtful reality. The only new entrants to the taxi market are individual drivers who, based on traditional taxi driver practices, are unlikely to make any change effecting consumer welfare. The one feasible method to encroach on the taxi market is to enter as a PHV operator. PHV drivers do not have to sit the Knowledge exam, sitting a less stringent topographical exam instead.[69] In order to open the market to competition there appears to be no substantiated reason why the less severe PHV exam could not apply equally to taxi drivers. This will ensure taxi drivers are not put at a disadvantage whilst allowing new firms and individual drivers to enter. Without new competitors, supra-competitive pricing and reduced service output continues to impair consumer welfare.

In conclusion, it is not surprising that licenced taxi drivers fought to protect their protected position in June 2014. Uber presents a serious threat, capable of transforming the market entirely. A High Court decision typifying the Uber app is not adequate to achieve the changes required as scrutinising existing regulation through a competition lens has revealed. Significant changes must be made to prevent new entrants, such as Uber, being thwarted in the market. Regulatory changes should be made that allow new and innovative fare calculation methods to be used in PHV’s. If this requires that taxis no longer have monopoly use over taximeters then this change should be made. Present technological situations have afforded an opportunity to evolve the taxi and PHV trade and should not be stunted by outmoded regulations. Imposing a less stringent entrance exam would stop the artificial restriction on supply in a relatively costless manner, opening up the taxi market to competition[70], increasing supply and reducing prices. These changes would create a level playing field. Without such changes consumers will continue to pay supra-competitive prices for an outdated and ineffective system.