A reflection on the taxi reform in China: Innovation vs. Tradition

Abstract

In contrast to the hostility shown in some other countries towards one of the most important examples of a sharing economy service, namely car hailing, China has always kept an open-minded attitude to this innovative Internet business model. After having been tolerant of unlicensed operations for years, China reformed the taxi industry by legalising car hailing in 2016. However, this process of reform was heavily affected by the political pressure generated by the drivers of traditional taxis. Following this reform, the taxi industry in China has been separated into two independent markets: one for traditional taxis and another for car hailing services. The Chinese experience provides a unique opportunity to study the sharing economy. This article comprises of a full evaluation of the abovementioned reform, with a specific focus on a number of characteristics specific to the taxi industry. We observed that quantity control of vehicles is still necessary in the Internet era due to imperfect competition and information asymmetries. Though the taxi reform in China has in some regards been beneficial, it has also had the unfortunate effect of preventing the taxi industry from taking full advantage of the benefits of the sharing economy. Consequently, we propose that the various levels of Chinese government should first establish a level playing field for traditional taxis and car hailing, and second, devise a mechanism to closely monitor the quantity of vehicles in the taxi market.