Southwest Airlines, MCI, and Now Uber: Lessons for Managing Competitive Entry into Taxi Markets

Abstract

Notwithstanding low capital investment requirements and a market structure that otherwise allows many thousands of competitors in big markets, taxis have long been treated as a regulated industry, with the same legal constraints as once applied to railroads, airlines, telecoms, electric, and other utilities. Now, Uber and other ridesharing services are upsetting that regulatory system, much as the competitive entry of Southwest Airlines or MCI upset the premises of regulation in their markets. This paper discusses the economic reasons that taxi markets were regulated as common carriers, with limited entry, rate regulation, and universal service obligations. And this paper explains how ride-sharing services change the market structure without creating the fear of a persistent new monopoly. Drawing on prior deregulatory practice, the paper then provides a roadmap for managing the transformation of “ride markets”: separate safety from economic regulation; ensure competitive neutrality; make universal service subsidies explicit; manage externalities directly; and reject claims from incumbents that their lost value somehow requires compensation.