FTC Staff Comment Before the Hon. Burton Natarus Concerning Ordinances Regulating Chicago Taxis
us-ftc-advocacy-filings-359d060decee61744bfcb40f49c8a2caFTC Staff Comment Before the Hon. Burton Natarus Concerning Ordinances Regulating Chicago TaxisAdvocacy Filing
Matter Number
P874629
I i/ FEDERAL TRADE CO~f~tISSIO:'\ Chicago Regional Office - . ,- _._. _...._--....... ---,~ }.. 17 q \f"nfll" Street '~'" Jllin"j, fiOhO:} e"d....112 .1,'):)· .... 21 January 12, 1987 Honorable Burton Natarus Chairman, Transportation Committee Chicago City Council City Hall 121 North LaSalle Street Chicago, IL 60602 Dear Alderman Natarus: The Federal Trade Commission's Chicago Regional Office and Bureaus of Competition, Consumer Protection, and Economics are taking this opportunity to respond to an invitation to provide comments on a series of proposed ordinance~ involving the regulation of taxicabs in the City of Chicago. The invitation, dated last August, originally requested that we provide oral testimony. However, due to the passage of time without a reconvening of the hearings, we are instead filing written comments. We hope that our views will be of assistance to you and fhe Chicago City Council in its consideration of this proposed legislation. The principal provision in the proposed reform of Chicago's taxi ordinance provides for the gradual elimination of the ceiling on the number of taxicab licenses in Chicago. 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 opportun- ities, 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 legalization of jitney services/and package deliveries, and an easing of restrictions on shared rides. We also believe that adoption of these provisions will benefit consumers in many of the same ways. 1 The views presented in this letter are not necessarily those of the Commission itself nor any individual Commissioner, although the Commission has authorized the presentation of these comments.
Honorable Burton Natarus Page 2 The Federal Trade Commission is charged by the United Sta~es Congress with maintaining competition and protecting consumers from restraints of trade. 2 In accordance with this role, the Commission and its staff submit comments upon request to federal, state, and local governmental bodies to advocate competition-based approaches to various policy issues to the maximum extent compatible with other legitimate goals. Our goal is to assist decision-makers by identifying how various legislative proposals may affect competition and consumers. Taxicab regulation is often viewed as a matter of only state or local concern. However, taxi services are frequently used by travelers from out of state, whether traveling for business or pleasure, and the operation of the industry is therefore a proper matter .for federal concern as well. 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 was another proposal before this Council to lift gradually 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 to taxicab regulation to the city governments of New York, Seattle, San Francisco, and the District of Columbia as well as to the Alaska and Colorado state legislatures: and the Commission issued administrative complaints against the cities of New Orleans and Minneapolis, challenging entry restrictions and price restraints. 3 2 3 See lS'U.S.C. § 41 et seq. 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 New Orleans complaint was withdrawn following the State of Louisiana's enactment of a law permitting its cities to regulate taxicabs in the manner the Commission had challenged. The Minneapolis complaint was withdrawn. following the city's amendment of its City Code to permit more competition among taxicabs.
Honorable Burton Natarus Page 3 In 1984, the Commission's Bureau of Economics completed a stu9Y of taxicab regulations. 4 Based on a careful analysis of taxicab regulation in cities throughout the country, the authors found no persuasive economic rationale for restric- tions on the total number of taxicabs, for absolute prohibitions on fare 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 of 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 a competitive environment or go without service or are forced to use unregulated "gypsy" cabs. Thus, low income riders, often unknowingly, are exposed to the dangers of riding uninsured, unlicensed vehicles operated by drivers of questionable ability, training, or credentials. Another study, commissioned by the U.S. Department of Transportation,5 confirm? the principal findings 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 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 importance to urban minority communities. As Professor Walter E. 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_ • •• [I]n Washington there is virtually no u,l t ' ,,6entry reg a Ion. • • • 4 5 6 Frankena, M., and Pautler, P., "An Economic Analysis of Taxicab Regulation," FTC Bureau of Economics, May 1984. Webster, A., Weiner, E'., and Wells, J. "The Role of Taxicabs in Urban Transportation," Department of Transportation, December 1974. The Wall Street Journal, June 11, 1984, p. 24.
Honorable Burton Natarus Page 4 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 on the operation and regulation of taxicabs in Chicago. 7 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 about the regulation of taxicabs in Chicago and concluded that the introductign of competition would reduce fares and increase services. A 1984 study of taxicab regulation in Chicago concluded that the granting of monopoly status, as under the current ordinance, to taxicab companies hurts service to low income neighbor- hoods, raises fares, reduces the supply of taxis, and undermines the health of the entire taxicab industry.9 The arguments for open entry that have been voiced 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 reports about 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 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. 7 8 9 The Transportation Center at Northwestern University, "The Operation and Regulation of Taxicabs in the City of Chicago," (March 27, 1958). Kitch, E., Isaacson, M., and Kasper, D., liThe Regulation of Taxicabs in Chicago," 14 J. Law & Econ. 285 (1971). J. Bast, "The Fight Over Cab Deregulation in Chicago" (1984) (availab1~ from The Heartland Institute).
Honorable Burton Natarus Page 5 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 which 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 ot cabs sitting empty in company lots. lO Chicago taxicab licenses have sold for as much as $28,500 each. ll 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. 10 11 Chicago Tribune, May 25, 1986, at Sec. 1, p. 18. Crain's Chicago Business, June 30, 1986, p. 2.
Honorable Burton Natarus Page 6 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, 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 experience of cities such as Washington, D.C. and London, which have not restricted entry, as well as the other cities that recently opened entry. Some cities that have eliminated restrictions on entry into the taxicab market have experienced taxi-related congestion at airports. These congestion problAIDs 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 number ot' taxicabs on the street should be limited in a manner di~ferent 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 wafting time is often not available, following
