FTC Staff Comment Before the Chicago City Council Committee on Local Transportation Concerning Regulation of Taxis

August 	14, 	1986
TESTI MONY 	OF
JOHN 	M. 	PETERSON
ACTING 	DIRECTOR
CHICAGO 	REGIONAL 	OFFICF.
FEDERAL 	TRADE 	COMMISSION
BEFORE 	THE
CHI CAGO 	CITY 	COUNCIL
COMMITTEE 	ON 	LOCAL 	TRANSPORTATION
It 	is 	a 	privilege 	to 	be 	here 	today 	to 	testify 	on 	the
ptopoG~d ordinance 	regarding 	the 	regulation 	of 	taxicabs. 	The
testimony 	I 	will 	present 	is 	that 	of 	the 	Federal Trade
Commission's 	Chicago 	Regional 	Office 	and 	the 	Bureaus 	of
Competition, 	Consumer 	Protection, 	and 	Economics. 	The 	views
presented 	in 	this 	testimony 	are 	not 	necessarily 	those 	of 	the
Commission 	itself 	or 	any 	individual Commissioner, 	although 	they
have 	authorized 	the 	presentation 	of 	these 	comments. 	We 	hope 	that
our 	views 	will 	be 	of 	assistance 	to 	the 	Chicago City Council 	in
its 	consideration 	of 	this 	proposed 	legislation.
The Federal 	Trade 	Commission 	is 	charged 	by 	the 	United 	States
Congress 	with 	maintaining 	competition 	and 	protecting 	consumers
from 	restraints 	of 	trade. l 	In 	accordance 	with 	this 	role, 	the
Commission 	and 	its 	staff 	submit 	written 	comments 	or 	provide
testimony 	upon 	request 	to 	federal, 	state, 	and 	local 	legislative
bodies 	or 	administrative 	agencies 	to 	advocate 	competition-based
approaches 	to 	various 	policy 	issues. 	Our 	goal 	Is 	to 	assist
decision-makers 	by 	identifying 	how 	various 	legislative 	proposals
may 	affect 	competition 	and 	consumers.
1 	S ee 	15 	U • S • C • 	§ 	41 	e t 	se q •

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The 	principal 	provision 	in 	the 	proposed 	reform 	of 	Chicago's
taxi 	ordinance 	provides 	for 	the 	maximum 	number 	of 	taxicab
licenses 	in 	Chicago 	to 	be 	increased 	to 	5,000 	!rom 	4,600 	upon
passage 	of 	the 	ordinance. 	The 	5,000 	limit 	would 	be 	increased 	to
5,500 	on 	January 	1, 	1987, 	and 	to 	6,000 	on January 	1, 	1988. 	As 	of
January 	1, 	1989, 	the 	limit 	would 	be 	aliminated 	entirely.' 	As
discussed 	below, 	we 	strongly 	support 	the 	passage 	of 	this
ordinance. 	Freer 	entry 	into 	the 	taxicab market 	will 	benefit
Chicago 	residents 	and 	visitors 	by 	increasing 	the 	number -of
taxicabs, 	thus 	reducing 	waiting 	times 	for 	taxis, 	providing
service 	to 	more 	neighborhoods, 	creating 	employment 	opportunities,
and 	keeping 	fares 	at 	levels 	lower 	than 	they 	would 	be 	in:a 	non-
competitive 	market. 	The 	proposal 	further 	calls 	for 	the
elimination 	of 	minimum 	fares, 	the 	legali2ation 	~f 	jitney 	services
and 	package 	deliveries; 	and 	an 	easing 	:f"'~tr;;~tions on 	shared
rides. 	We 	also 	believe 	that 	adoption 	of 	these 	provisions 	will
benefit 	consumers 	in 	many 	or 	the 	same 	ways.
As 	you 	may 	know, 	the 	Chicago Regional 	Office 	of 	the 	Federal
Trade 	Commission 	has 	been 	interested 	in 	the 	reform 	of 	taxicab
regulation 	in 	Chicago 	for 	some 	time. 	In 	1984, 	when 	there 	~as
another 	proposal 	before 	this 	Council 	to 	gradually 	lift 	the 	limit
on 	taxicab 	licenses, 	we 	filed 	written 	comments 	supporting 	open
entry.
In 	addition, 	the 	Federal 	Trade 	Commission 	staff 	has 	been
interested 	in 	issues 	affecting 	taxicab 	regulation 	in 	other
cities. 	The 	Commission's 	staff 	has 	submitted 	comments 	relating
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to 	taxicab 	regulation 	to 	the 	city 	governments 	of 	Seattle, 	San
Francisco, 	and 	the 	District 	of 	Columbia 	as 	well 	as 	to 	the 	Alaska
.z.
and 	Colorado 	state 	legislatures, 	and 	the 	Commission 	issued
administrative 	complaints 	against 	the 	cities 	of 	New Orleans 	and
Minneapolis, 	challenging 	entry 	restrictions 	and 	price
re5traints. 2
1
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regulation 	in 	cities 	throughout 	the 	country, 	the 	authors 	found
In 	1984, 	the 	Commission's 	Bureau 	of 	Economics 	completed 	a
persuasive 	economic 	rationale 	for 	restrictions 	on 	the 	total
number 	of 	taxicabs, 	for 	absolute 	prohibitions 	on 	fare
study 	of 	taxicab 	regulations 	entitled 	"An Economic Analysis 	of
Taxicab 	Regulation." 	Based 	on 	a 	careful 	analysis 	of 	taxicab
competition, 	or 	for 	restrictions 	on 	shared 	ride 	or 	jitney
service. 	The 	study 	concluded 	that 	such 	restrictions 	harm
consumers 	and 	impose 	a 	disproportionate 	burden 	on 	low 	Income
people, 	including 	the 	elderly 	and 	handicapped, 	many 	of 	whom 	are
more 	reliant 	on 	and 	expend 	a 	greater 	share 	or 	their 	income 	for
taxi 	service 	than 	do 	members 	of 	other 	segments 	of 	the ..
population. 	As 	a 	consequence 	of 	these 	restrictions, 	these
consumers 	either 	pay 	more 	for 	taxicab 	service 	than 	they 	would 	in
2 	The 	complaints 	indicated 	that 	the 	Commission 	had 	reason 	to
believe 	that 	each 	city, 	acting 	in 	concert 	with 	local 	cab
companies, 	had 	violated 	the 	antitrust 	laws 	by 	restricting
entry 	into 	taxicab markets 	and 	adopting 	uniform 	fares 	with-
out 	authorization 	by 	the 	state 	legislature 	to 	so 	restrain
competition. 	The 	complaints 	were 	withdrawn 	(ollowing 	the
State 	of 	Louisiana's 	enactment 	of 	a 	law 	permitting 	its
cities 	to 	regulate 	taxicabs 	in 	an 	anticompetitive 	manner, 	on
the 	one 	hand, 	and 	Minneapolis' 	amendment 	of 	its 	City Code 	to
permit 	more 	competition 	among 	taxicabs, 	on 	the 	other.
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a 	competitive 	environment 	or 	go 	without 	service 	or 	are 	forced 	to
utilize 	unregulated 	"gypsy" 	cabs. 	Thus, 	low 	income 	riders, 	often
unknowingly, 	are 	exposed 	to 	the 	dangers 	of 	riding 	uninsured,
unlicensed 	vehicles 	operated 	by 	drivers 	o! 	questionable 	ability,
training, 	or 	credentials.
Another 	study, 	commissioned 	by 	the 	u.s. 	Department 	of 	Trans-
portation, 	confirms 	the 	principal 	conclusions 	of 	the 	Bureau 	of
Economics 	report. 	This 	study 	concluded 	that 	regulations
restricting 	entry 	of 	new 	cabs 	and 	preventing 	discounting 	of 	fares
cost 	consumers 	nearly 	$800 	million 	annually. 	Moreover, 	the 	study 	~I
predicts 	that 	the 	removal 	of 	these 	restrictions 	would 	create
38,000 	new 	jobs 	in 	the 	taxi 	industry.
An 	example 	of 	the 	success 	of 	open 	entry 	is 	provided 	by 	the
District 	of 	Columbia,. where 	ease 	of 	entry 	has 	expanded 	employment
and 	entrepreneurial 	opportunities 	-- 	a 	matter 	of 	particular
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importance 	to 	urban 	minority 	communities. 	As 	Professor 	Walter 	E. 	pre
Williams 	has 	noted: 	"While 	blacks 	own 	few 	taxis 	in 	most 	major
cities 	with 	large 	black 	populations, 	they 	own 	more 	than 	70
percent 	of 	the 	taxis 	in Washington. 	This 	is 	no 	accident. 	• 	• 	• Jrm
[1]n 	Washington 	there 	is 	virtually 	no 	entry 	regulation •••• "3
These 	general 	conclusions 	are 	applicable 	to 	the 	Chicago
taxicab 	market 	according 	to 	several 	economic 	studies. 	In 	1958,
the 	Transportation 	Center 	of 	Northwestern University 	prepared 	an
independent 	research 	report 	entitled 	"The 	Operation 	and
3 	The 	Wall 	Street 	Journal, 	June 	11, 	1984, 	p. 	24.
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~ ly

"- 	--- --- --JO 	r.vo
Regulation 	of 	Taxicabs 	in 	The 	City 	of 	Chicago." 	That 	report,
which 	was 	introduced 	in 	City Council 	hearings 	at 	that 	time,
concluded 	that 	the 	best 	interests 	of 	the 	public 	would 	be 	served
by 	unrestricted 	entry 	into 	the 	taxicab 	business 	in 	Chicago 	and
the 	elimination 	of 	mandatory 	fares. 	Thirteen 	years 	later,
Professor 	Edmund 	Kitch 	and 	his 	colleagues 	at 	the 	University 	of
Chicago 	Law 	School 	wrote 	a 	study 	entitled 	"The 	Regulation 	of
Taxicabs 	in 	Chicago," 	which 	concluded 	that 	the 	introduction 	of
competition 	would 	reduce 	fares 	and 	increase 	services. 	In 	a 	1984
article 	entitled 	"The 	Fight Over 	Cab Deregulation 	in Chicago,"
Heartland 	Institute's 	Joseph 	L. 	Bast 	stated 	that 	the 	granting 'of
monopoly 	status, 	as 	under 	the 	current 	ordinance, 	to 	taxicab
companies 	hurts 	service 	to 	low 	income 	neighborhoods, 	raises
fares, 	reduces 	the 	sqpply 	o! 	taxis, 	and 	undermines 	the 	health 	of
the 	entire 	taxicab 	ifidustry. 	The 	arguments 	for 	open 	entry 	that
have 	been 	voiced 	in 	these 	halls 	for 	nearly 	four 	decades 	have 'even
stronger 	support 	today.
Who 	gains 	from 	restricted 	taxicab 	entry 	such 	as 	that
endorsed 	by 	Chicago's 	present 	taxi 	ordinance? 	Not 	the 	drivers,
not 	the 	poor, 	not 	minorities, 	and 	not 	the 	general 	public, 	all 	of
whom 	suffer 	the 	economic 	effects 	of 	these 	entry 	restrictions.
The 	primary 	beneficiaries 	of 	the 	current 	system 	are 	the 	long-time
holders 	of 	the 	licenses.
It 	is 	clear 	from 	the 	history of 	Chicago 	taxi 	regUlation 	that
the 	Chicago 	taxicab 	companies 	have 	been 	strong 	advocates 	of 	entry
restrictions. 	Beginning 	in 	the 	late 	1920's, 	Checker 	Taxi 	Co. 	and
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Yellow 	Cab 	Co. 	representatives 	argued 	for 	entry 	limitations 	to
curb 	competition 	caused 	by 	the 	cabs 	then 	licensed. 	In 	the
1930's, 	Checker 	and 	Yellow 	jointly 	sought 	a 	reduction 	in 	the
number 	of 	licenses 	then 	outstanding, 	and 	the 	City 	acquiesced
under 	the 	threat 	of 	a 	taxi 	strike. 	In 	the 	1940's, 	Yellow 	and
Checker 	vigorously 	objected 	to 	an 	ordinance 	authorizing 	an
increase 	from 	3,000 	to 	5,500 	taxicabs. 	They 	sued 	the 	City 	for
its 	attempt 	to 	increase 	competition, 	while 	in 	another 	court 	they
were 	defending 	United 	States 	Justice 	Department 	charges 	that 	they
had 	conspired 	to 	monopolize 	the 	taxicab 	business 	in 	Chicago. 	The
United 	States 	lost 	its 	case, 	primarily 	on 	a 	jurisdictional
issue. 	Chicago 	remained 	in 	court 	defending 	itself 	from 	Yellow
and 	Checker's 	lawsuits 	until 	1963, 	when 	the 	city 	enacted 	the
current 	ordinance 	whiph 	reaffirmed 	a 	license 	limit 	of 	4,600 	and
granted 	Checker 	and 	Yellow 	80 	percent 	of 	the 	market.
Economists 	see 	Chicago 	as 	a 	city 	where 	the 	ceiling 	on 	the
number 	of 	licenses 	has 	given 	the 	major 	taxicab 	companies 	market
power. 	Like 	a 	typical 	cartel, 	the 	companies 	reportedly 	have 	been
able 	to 	cut 	back 	the 	number 	of 	cabs 	and 	collect 	monopoly
profits. 	In 	the 	past, 	Checker 	and 	Yellow 	have 	acknowledged 	that
20 	percent 	of 	their 	cars 	typically 	are 	out 	of 	service 	-- 	for
maintenance. 	In 	his 	article, 	Professor 	Kitch 	estimated 	that
there 	were 	more 	idle 	cabs 	than 	those 	in 	repair 	shops. 	Even
today, 	we 	continue 	to 	hear 	reports 	of 	cabs 	sitting 	empty 	in
company 	lota. 4
4 	Chicago 	Tribune, 	May 	25, 	1986 	at 	Sec. 	1, 	p. 	18.
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Chicago 	taxicab 	licenses 	have 	sold 	for 	as 	much 	as 	$28,500
each. 5 	These 	high 	license 	prices 	are 	evidence 	that 	entry
restrictions 	have 	raised 	the 	rate 	of 	return 	in 	the 	taxi 	industry
significantly 	above 	the 	competitive 	rate 	in 	the 	rest 	of 	the
economy. 	The 	high 	license 	prices 	are 	also 	evidence 	that 	entry
restrictions 	have 	led 	to 	some 	combination 	of 	higher 	fares, 	longer
waiting 	times, 	shortages 	of 	service, 	and 	reduced 	consumption 	of
taxi 	rides, 	and 	therefore 	have 	caused 	a 	waste 	of 	resources.
Further 	evidence 	of 	the 	above 	normal 	rate 	of 	return 	and 	social
waste 	resulting 	from 	restrictions 	on 	the 	number 	of 	licenses 	is
that 	in 	one 	year 	a 	single 	license 	can 	bring 	in 	more 	than 	$6,000
rent. 	The 	weekly 	lease 	price 	of 	the 	license 	alone 	has 	been
reported 	to 	be 	approximately 	$120, 	exclUding 	insurance. 	On 	a
daily 	basis, 	these 	figures 	mean 	that 	cab 	drivers 	have 	to 	collect
approximately 	$20 	on 	top 	of 	all 	other 	expenses 	before 	they 	can
make 	any 	profit. 	This 	assessment 	against 	the 	taxi 	riders 	of 	the
city 	is 	simply 	monopoly 	profit 	for 	the 	owner 	of 	the 	license.
Opening 	entry 	would 	eliminate 	this 	monopoly 	profit.
One 	of 	the 	arguments 	most 	frequently 	advanced 	in 	opposition
to 	open 	entry 	is 	that 	traffic 	congestion 	and 	chaos 	in 	the 	streets
will 	inevitably 	result. 	Lifting 	the 	license 	limit, 	however,
could 	actually 	help 	alleviate 	congestion 	problems. 	More 	cabs 	can
mean 	fewer 	private 	automobiles. 	Taxis, 	by 	serving 	as 	a 	link-up,
5 	Crain's 	Chicago Business, 	June 	30, 	1986, 	p. 	2.
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have 	the 	potential 	to 	increase 	the 	use 	of 	public 	transportation
and 	decrease 	the 	number 	of 	those 	who 	drive 	to 	work. 	For 	example,
many 	people 	in 	Chicago 	may 	bring 	their 	own 	cars 	downtown
crowding 	expressways 	and 	filling 	parking 	lots 	-- 	simply 	because
they 	have 	a 	midday 	trip 	and 	cannot 	count 	on 	finding 	a 	cab 	at 	that
time. 	Thus, 	one 	taxicab 	in 	the Loop 	can 	do 	the 	work 	of 	many
private 	cars. 	The 	Commission's 	1984 	Bureau 	of 	Economics' 	study
concluded 	that 	the 	downtown 	congestion 	argument 	is 	refuted 	by 	the
t!xperience 	of 	cities 	such 	as 	Washington, 	P.C. 	and 	London, 	which
have 	not 	restricted 	entry, 	as 	well 	as 	the 	other 	cities 	that
rccantly 	opened 	entry.
Same 	cities 	that 	have 	eliminated 	restrictions 	on 	entry 	into
the 	taxicab 	market 	have 	experienced 	taxi-related 	congestion 	at
airports. 	These 	congestion 	problems 	have 	generally 	occurred 	when
both 	maximum 	fares 	and 	entry 	have 	been 	deregulated
simultaneously. 	Yet 	the 	solution 	to 	congestion 	problems 	lies 	not
in 	restricting 	the 	number 	of 	taxis 	or 	maintaining 	fixed 	fare
restrictions. 	Rather, 	as 	the 	FTC'S 	Bureau 	of 	Economics' 	study
concluded, 	revisions 	in 	the 	first-in-first-out 	queue 	system,
improvements 	in 	fare 	posting 	requirements, 	increased 	cab 	line
user 	fees, 	or 	lower 	fare 	ceilings 	provide 	workable 	solutions 	to
congestion 	problems 	without 	simultaneously 	depriving 	conSumers 	of
the 	benefits 	of 	a 	competitive 	taxicab market.
There 	are 	approximately 	1,000,000 	cars, 	buses, 	and 	trucks
registered 	in Chicago, 	but 	only 	4,600 	cabs. 	Only 	the 	number 	of
cabs 	is 	restricted 	by 	law. 	There 	is 	no 	sound 	reason 	why 	the
... 	8 	-

numbe r 	of 	ta xi cabs 	on 	the 	s tree t 	shoul a 	be 	limi ted 	in 	a 	manner
different 	from 	private 	cars, 	trucks, 	and 	other 	commercial
vehicles. 	Taxicabs 	can 	be 	required 	to 	pay 	their 	fair 	share 	of
the 	costs 	of 	using 	the 	streets 	by 	paying 	license 	fees, 	gasoline
taxes, 	and 	the 	other 	traditional 	charges. 	Limiting 	the 	number 	of
taxicabs 	does 	not 	serve 	the 	purpose 	of 	minimizing 	congestion.
Will 	open 	entry 	diminish 	quality 	of 	service? 	The 	FTC's
Bureau 	of 	Economics' 	study 	found 	no 	systematic 	evidence 	of
quality 	deterioration 	following 	the 	lifting 	of 	entry 	restrictions
in 	other 	cities. 	While 	data 	to 	measure 	the 	effects 	on 	waiting
time 	is 	often 	not 	available, 	following 	deregulation 	in 	San 	Diego,
the 	average 	waiting 	time 	in 	the 	radio-dispatched 	market 	declined
20 	percent 	and 	the 	average 	waiting 	times 	at 	major 	cab 	stands
became 	negligible. 	Furthermore, 	other 	regulations 	such 	as 	those
dealing 	with 	driver 	qualifications 	and 	vehicle 	safety 	ar~_
specifically 	aimed 	at 	ensuring 	quality 	of 	service.
While 	our 	comments 	have 	focused 	on 	the 	more 	controversial
open 	entry 	provisions 	of 	the 	proposed 	ordinance, 	we 	also 	support
the 	elimination 	of 	minimum 	fares, 	as 	well 	as 	the 	proposals 	to
allow 	regulated 	jitney 	service, 	package 	delivery 	and 	shared
rides. 	Our 	economists' 	report 	found 	no 	~conomic 	justification
for 	such 	restrictions. 	By 	contrast, 	the 	report 	found 	potential
justifications 	for 	fare 	ceilings 	under 	certain 	circumstances 	and
for 	regulations 	dealing 	with 	matters 	such 	as 	vehicle 	saf~ty and
liability 	insurance 	coverage.
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In 	summary, 	we 	strongly 	believe 	t~at 	the 	removal 	of 	taxicab
entry 	restrictions 	as 	well 	as 	the 	other 	anticompetitive
provisions 	will 	provide 	substantial 	benefits 	to 	Chicago 	residents
and 	visitors. 	Limiting 	the 	number 	of 	taxicab 	licenses 	has 	merely
protected 	taxicab 	compani~s at 	the 	expense 	of 	consumers. 	As
previously 	discussed, 	these 	regulations 	especially 	harm 	oertain
disadvantaged 	groups. 	We 	do 	not 	object, 	however, 	to 	appropriate
regulations 	specifically 	designed 	and 	directly 	related 	to 	quality
and 	safety 	standards, 	such 	as 	mandatory 	driver 	training 	classes
and 	tougher 	penalties 	for 	ordinance 	violations.
In 	conclusion, 	we 	strongly 	support 	the 	efforts 	to 	eliminate
anticompetitive 	e£fects 	of 	the 	current 	ordinance.
At 	this 	time, 	we 	stand 	ready 	to 	respond 	to 	any 	questions 	you
might 	have.
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