Building competitiveness A fare fight Taxi markets are a perfect test of Europe’s willingness to change. The first in an occasional series on structur

MANY a journey starts in a taxi. So it is with the road to deregulation in the euro zone’s economies. Mario Monti, Italy’s prime minister, has prioritised liberalisation of taxi licences; Italy’s cabbies are striking as a result. Greek taxi-drivers have blockaded streets several times in protest against deregulation. Why have taxis become emblematic of the battle to free hidebound economies?

The superficial answer is that taxis are iconic: think of the badges, the bold colours and the recognisable models. The complex answer is that these features are themselves the result of regulation, and not just in the euro zone. From the turning-circle of a London taxi to the medallions on the hood of a New York cab, this industry picks up rules as easily as fares.

Taxi markets should be simple. Costs of entry are low. There are rarely large incumbent firms. On paper, competition should flourish. But low barriers to entry create a risk of having too many taxis on the roads. The number of taxi drivers in New York and Washington, DC, shot up between 1930 and 1932, as the unemployed sought work during the Depression. Such surges lead to rules to reduce congestion. America started to set up new regulatory authorities in the early 1930s; Britain established binding numerical limits on horse-drawn coaches way back in 1635.

Cab fares can be problematic, too. Unregulated competition means that fares fall to little more than a driver’s expenses. These expenses are influenced by distance (fuel costs), duration (the cost of time) and destination. The end-point for a trip is vital: some destinations (airports, say) will pretty much guarantee a return fare; others will not. This means journeys of a similar distance can have very different costs, so working out a fair price is tricky. In an unregulated market passengers would have to search out a competitive price, a time-consuming process of hailing or calling a number of cabs. That allows taxi operators to run an opaque pricing structure.

The response to this problem in many jurisdictions has been regulation to establish a uniform price, giving customers certainty over what they will pay. But as a result journeys that are the same distance end up varying hugely in value for drivers. Short trips around tourist destinations are lucrative; trips to more remote areas, or on congested commuter routes, are much less profitable. Since full-time cabbies cannot raise prices, they may refuse to operate at less popular times or to carry passengers who live at the wrong end of town.