FTC Staff Comment Before the Cambridge License Commission Concerning Report of the Cambridge Taxi Advisory Committee

~11"
'0 e:a-a, $1_
"10"......-c"'- Ql222.1D1)
1.t7l"~
IDlITEr> STATES OF AMERICA 	V870013
FEDERAL TRADE COMMISSION
BOSTON REGIONAL OfFICE
COMMISSION 	AUTHORIZED
July 	30, 	1987
Mr. 	James 	T. 	McDavitt, 	Chairman
Cambridge 	License 	Commission
City 	of 	Cambridge
City 	Ball
Cambridge, 	Massachusetts 	02139
Dear 	Chairman 	McOavitt:
We 	are 	pleased 	to 	respond 	to 	your 	invitation 	for 	comments 	on
the 	Report 	of 	the 	Cambridge 	Taxicab 	Advisory 	Committee 	(the
·Committee-).1 	The 	Report 	contains 	19 	separate 	recommendations
to 	the 	City 	Council, 	52 	recommendations 	to 	the 	License
Commission, 	and 	7 	recommendations 	to 	other 	city.agencies. 	We
believe 	that 	many 	of 	the 	recommendations 	in 	the 	Report 	reflect 	an
attempt 	to 	deal 	with 	problems 	in 	the 	taxi 	industry 	by
establishing 	an 	expanded 	regulatory 	program 	of 	fixed 	fares 	and
restricted 	entry. 	We 	suggest 	that 	instead 	of 	implementing
additional 	regulations 	that 	may 	be 	costly 	to 	administer 	and
difficult 	to 	enforce, 	the 	city 	reconsider 	the 	basic 	premise 	of
its 	regulatory 	approach. 	Specifically, 	we 	suggest 	that 	you
consider 	letting 	market 	forces 	determine 	both 	the 	number 	of 	cabs
and 	the 	fares 	they 	will 	charge. 	This 	approach 	will 	help
consumers 	far 	more 	than 	would 	incremental 	adjustments 	to 	the
existing 	regulations.
1 	This 	letter 	represents 	the 	views 	of 	the 	Federal 	Trade
Commissionls 	Boston 	Regional 	Office 	and 	the 	Bureaus 	of
Competition, 	Consumer 	Protection 	and 	Economics, 	and 	not
necessarily 	those 	of 	the 	Commission 	itself 	or 	any 	individual
Commissioner. 	The 	Commission 	has, 	however, 	voted 	to 	authorize
submission 	of 	these 	comments, 	Commissioner 	Bailey 	dissenting.

· '
Mr. 	James 	T. 	McDavitt 	Page 	2
We 	believe 	that 	the 	costs 	of 	Cambridge's 	Current 	regulatory
approach 	are 	substantial. 	As 	discussed 	below, 	we 	estimate 	that
the 	regulations 	cost 	Cambridge 	taxicab consumers 	at 	least
$1,500,000 	annually. 	In 	addition 	to 	this 	monetary 	cost,
consumers 	must 	suffer 	the 	long 	waiting 	times 	and 	poor 	service
resulting 	from 	a 	shortage 	of 	cabs 	and 	a 	lack 	of 	competitive
incentives. 	Drivers 	or 	others 	who 	would 	like 	to 	operate 	their
own 	cabs 	are 	also 	harmed. 	They 	must 	pay 	the 	$60,000 	price 	of 	a
medallion 	-- 	if 	they 	can 	find 	one 	for 	sale. 	The 	costs 	of 	lost
opportunity 	to 	drivers 	and 	of waiting 	time 	for 	consumers 	are 	not
easily quantified, 	but 	we 	believe 	that 	they 	too 	are 	significant.
Interest 	clf 	the 	l'ederal 	Trade ColIIDission
The 	Federal 	Trade 	Commission 	has 	long 	been 	interested 	in
this 	subject. 	In 	1984, 	the 	Commission's 	Bureau 	of 	Economies
released 	a 	2eport 	entitled 	An 	Economic 	Analysis 	of 	Taxicab
Regulation. 	Based on 	a 	careful 	study 	of 	regulatory 	systems 	in
cities 	throughout 	the 	country, 	the 	authors 	found, 	among 	other
things, 	that 	there 	is 	no 	persuasive 	economic 	rationale 	for
restricting 	the 	total 	number 	of 	taxicabs. 	The 	study 	found 	that
such 	restrictions 	waste 	resources, 	harm consumers 	by 	making 	taxis
more 	difficult 	to 	find, 	and 	impose 	a 	disproportionate 	burden 	on
low-income 	people, 	including 	the 	elderly 	and 	handicapped, 	who 	are
most 	dependent 	on 	public 	transportation. 	On 	the 	other 	hand, 	the
report 	noted 	that 	other 	kinds 	of 	taxicab 	regulations, 	such 	as
those 	relating 	to 	driver 	training 	and 	knowledge 	vehicle 	safety 	or
liability 	insurance, 	maY3be 	justifiable 	as 	a 	means 	of 	protecting
consumers 	against 	abuse.
The 	Commission's 	staff 	has 	submitted 	comments 	concerning
taxicab 	regulation 	to 	the 	city 	governments 	of 	Anchorage, 	Chicago,
New 	York, 	San 	Francisco, 	Seattle 	and 	Washington, 	D.C., 	as 	well 	as
to 	the 	Alaska 	and 	Colorado 	legislatures. 	Further, 	the 	Commission
issued 	administrative 	complaints 	in 	1984 -against 	Minneapolis 	and	,
2 	See 	Bureau 	of 	Economics, 	Federal 	Trade 	Commission, 	An 	Economic
Analysis 	of 	Taxicab 	Regulation 	(May 	1984).
3 	Another 	1984 	study, 	commissioned 	by 	the 	U.S. 	Department 	of
Transportation, 	confirms 	the 	principal 	conclusions 	of 	our 	Bureau
of 	Economics 	report. 	The 	DOT 	study 	concluded 	that 	these
restrictions 	cost 	consumers 	nearly 	$800 	million 	annually 	in
higher 	fares, 	and 	resulted 	in 	38,000 	fewer 	jobs 	nationwide 	in 	the
taxi 	industry. 	B.C. 	wainwright' 	Co., 	II 	Economic 	Regulatory
Impediments 	to 	PrivatE~ Sector 	Orban 	Transit 	at 	85 	(198").

Mr. 	James 	T. 	McDavitt 	Page 	3
New 	Orleans, 	challen9i~94entry restrictions 	and 	~:lce restraints
imposed 	by 	those 	cltie~.
Adverse 	Con~eguence8 of Current 	Regulations
At 	present, 	t.he 	C'! ty of 	Camhr idge 	closely 	regula tea 	the
taxicab 	industry 	throu~h the 	License 	Commission. 	The 	number 	of
medallions 	has 	been 	fixed 	at 	248 	since 	1943, 	thereby 	restricting
entry 	into 	the 	market. 	The 	City 	has 	also 	imposed 	a 	fixed 	fare
structure 	that 	eliminates price 	competition. 	Additional 	rules
and 	regulations 	govern 	vehicle 	safety 	and 	appearance, 	and 	the
conduct 	of 	owners 	and 	drivers. 	This 	extensive 	system of
regulation 	appears 	to 	have 	resulted 	in 	higher 	fares 	for
consumers, 	poor 	servi~e, and 	the 	concentration 	of 	medallion
ownership 	in 	the 	hands of 	a 	few 	firMS.
The 	most 	important of 	these 	problems 	is 	inflated 	consumer
prices. 	The 	$60,000 	value 	of 	taxicab 	medallions 	indicates 	that
entry has 	been 	.:estric:ted 	below 	the 	competitive 	level 	and 	that
fares 	are 	higher 	than 	they 	would 	be 	if 	competition 	existed. 	One
metho~ 	of 	estimating 	the 	resulting 	injury 	to 	taxicab 	consumers 	is
to 	calculate 	the 	stream of 	future 	profits 	that 	would 	allow 	the
medallion 	owner 	to 	recoup 	the 	$60,ryOO 	investment. 	At 	a 	10\ 	rate
of 	interest, 	a 	stream'of 	profits 	of 	$6,000 	annually 	would 	be
necessary. 	When 	this 	figure 	is 	multiplied 	by 	the 	248 	medallions,
the 	estimated 	annual 	consumer 	injury 	totals 	about 	$1.5 	million.
While 	the 	10' 	interest 	rate 	used 	above 	represents 	the 	cost
of 	capital 	in 	the 	economy generally, 	most 	medallion 	purchasers
cannot 	find 	a 	loan 	at' such 	a 	low 	rate. 	Ac=ording 	to 	the 	License
Commission, 	a 	typical 	loan 	for 	a 	medallion 	purchase 	would 	require
borrowing 	$52,000 	at 	24% 	interest 	for 	eight 	years. 	To 	make
payments 	on 	such 	a 	loan, 	a 	new 	medallion 	owner 	must 	earn 	an
additional 	$270 	each 	week. 5 	If 	all 	of 	the 	248 	medallions 	were
recently 	purchased 	under 	such 	l~an 	terms, 	this ~ould amount 	to
4 	The 	complaints 	stated 	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 	by 	adopting 	uniform 	fares. 	The
complaints 	were 	withdrawn 	following 	Louisiana's 	enactment 	of 	a
law 	expressly 	permitting 	its 	cities 	to 	regulate 	taxicabs 	in 	an
anticompetitive 	manner 	exempt 	from 	the 	antitrust 	laws, 	and
Minneapolis' 	amendment 	of 	its 	City 	Code 	to 	permit 	more
competition 	among 	ta]ticabs.
5 	Loans 	for 	shorter 	periods, 	even 	with 	lower 	interest 	rates,
could 	involve 	higher 	weekly 	costs.

Mr. 	James 	T. 	McDavitt
additional 	charges 	of 	nearly 	$3.5 	million 	annually 	during 	the
pay-off 	period 	of 	the 	~oans.
These 	extra 	charges do 	not 	cover 	any 	of 	the 	real 	costs 	of
providing 	service, 	nor'are 	they 	a 	tax 	to maintain 	the 	streets 	or
pay 	for 	regulations. 	They 	are 	simply 	a 	transfer 	of 	money 	from
consumers 	to medallion 	owners 	that 	has 	been 	ordered 	by 	the 	City
of 	Cambridge 	through 	its 	restriction 	on 	the 	number 	of 	taxicab
medallions.
In 	addition 	to 	capsing 	artificially 	high 	fares, 	the 	limited
number 	of medallions 	and 	fixed 	fare 	structure 	restrict
competition, 	resulting 	in 	poor 	service 	quality. 	Specifically,
the 	License 	Commission 	has 	received 	complaints 	about 	shortages 	of
cabs, 	long 	waiting 	times, 	and 	unanswered 	calls.
The 	Committee 	also 	is 	concerned 	about 	the 	accumulation 	of
actual 	ownership or 	a 	large 	degree 	of 	control 	of 	a 	substanti?l
proportion 	of 	the 	248 	medallions 	in 	the 	hands 	of 	a 	few 	companies,
some 	of 	which 	also 	run 	radio 	dispatch 	services 	and 	provide 	loans
for 	medallion 	purchas~s. 	Such 	industry 	concentration 	arguably
would 	decrease 	competition 	for 	quality 	service 	and 	reduces 	the
medallion 	owners' 	inc~ntives to 	have 	a 	taxiiab 	operating 	to 	the
fullest 	extent 	possible 	for 	each 	medallion. 	In 	addition, 	the
License 	Commission 	has 	received 	complaints 	charging 	that 	the
dispatch 	service 	comp~nies favor 	those 	who 	have 	loan 	payments 	due
to 	those 	same 	compani~s.
~e 	CUrrent 	Proposals Will 	Rot 	Solve 	the 	Probleas!
In 	an 	attempt 	to 	address 	the 	problems 	caused 	by 	the 	current
regulatory 	framework, 	the 	Committee 	proposes 	to 	make 	only
incremental 	adjustments 	to 	the 	current 	system. 	Por 	example, 	to
alleviate 	the 	burden ,)f 	high 	fares 	on 	the 	elderly, 	handicapped
and 	low-income 	consumers, 	the 	Committee 	proposes_to 	introduce
special 	discounts 	for 	those 	riders 	and 	a 	system of 	group 	fares
for 	trips 	to 	Logan 	Airport 	from 	certain Cambridge 	neighborhoods
and 	trips 	from 	supermarkets 	and 	hospitals 	to 	Cambridge
6 	Medallion 	owners 	could 	reduce 	the 	number 	of 	cabs 	in 	service
during 	the 	busiest 	times 	in 	order 	to persuade 	the 	Cambridge
government 	that 	a 	fare 	increase 	is 	needed 	to 	raise 	the 	incentive
for 	operating 	cabs. 	The 	effectiveness 	of 	such 	a 	reduction 	in
operations 	depends 	on 	the 	number 	of 	medallion5 	that
participate. 	Concentrating 	medallion 	ownership 	in 	the 	hands 	of 	a
few 	holders 	will 	facilitate 	coordination, 	or 	may 	give 	one 	large
owner 	sufficient 	share 	to 	accomplish 	a 	reduction 	even 	without 	the
other 	medallion 	owners.

·.
Mr. 	Ja~e8 T. 	McDavitt 	Page 	5
resi~eneeB. 	Hovever, 	if 	drivers 	can 	identify 	discount 	consumers
In 	advance, 	some 	may 	refuse 	such 	calls 	just 	as 	some 	nov 	refuse 	to
take 	calls 	for 	short 	trips. 	The 	License 	CO~ls8ion knows 	from
experience 	the 	difficulty 	of 	enforcing 	rules 	requiring 	that 	each
call 	be 	ansvered. 	Moreover, 	to 	compensate 	for 	such 	discount
fares, 	the 	Committee 	is 	proposing 	to 	increase 	the 	regular 	rates
by 	2S'. 	Thus, 	the 	situation 	for 	the 	ordinary 	ta%i 	rider 	vill 	be
exacerbated, 	and 	the 	underprivileged 	may 	also 	e%perienee
diminished 	levels of 	service, 	albeit 	at 	-discount- 	fares.
The 	Committee 	off~rs a 	number 	of 	proposals 	in 	response 	to
complaints 	about 	poor 	~ervice. 	It 	proposes 	a 	six-month 	period
during 	which 	the 	Licens,.e 	Commission 	will 	monitor 	responses 	to
calls 	to 	determine 	whether 	there 	is 	·unmet- 	demand. 	The
Committee 	further 	suggests 	that 	the 	License 	Commission
-encourage· 	the 	operat~on of 	cabs 	to 	the 	fullest 	extent 	possible
during 	the 	monitoring 	period. 	This 	proposal 	suffers, 	however,
from 	the 	fact 	that 	it 	"ill 	simply 	induce 	an 	abnormally 	high 	level
of 	taxicab 	operation 	for 	six 	months 	without 	addressing 	the 	level
of 	operation 	after 	this 	period.
In 	addition, 	the 	~ommittee proposes 	that 	the 	City 	Counsel
pass 	an 	ordinance 	requiring 	that 	the 	issuance 	of 	any 	additional
medallions 	be 	predicated 	on 	consideration of 	one 	or 	more 	factors
such 	as: 	increases 	in medallion 	prices, 	the 	number 	of 	complaints
or 	unanswered 	calls 	or 	demographic 	statistics. 	The 	problem with
both 	of 	these 	approaches 	is 	that 	it 	is 	extremely 	difficult, 	if
not 	impossible, 	to 	determine 	administratively 	how may 	cabs 	are
needed 	or 	what 	fares 	should 	be 	charged. 	Even 	if 	the 	City 	of
Cambridge 	were 	to 	select 	the 	proper 	number 	of 	cabs 	and 	fare
schedule 	to 	emulate 	a 	competitive 	market, 	it 	would 	be 	unable 	to
make 	the 	continual 	ch~nges needed 	to 	accommodate 	market 	changes
over 	time.
To 	improve 	the 	ut:ilization 	of 	existing 	cabs, 	the 	Committee
proposes 	that 	the 	License 	Commission 	encourage 	all 	taxicabs 	to
use 	a 	radio 	service. 	Radio 	services, 	in 	turn, 	would 	be 	regUlated
to 	ensure 	that 	each 	c~ll is 	answered. 	Such 	regulations 	would,
however, 	require 	detailed 	monitoring 	of 	both 	calls 	and
responses. 	Even 	selecting 	sample 	calls 	and 	responses 	would 	make
enforcement 	difficult 	and 	costly~
Lastly, 	in 	response 	to 	the 	domination 	of 	the 	taxicab 	market
by 	a 	few 	companies 	that 	have 	large 	fleets, 	their 	own 	radio
dispatch 	service, 	and 	internal 	financing 	for 	the 	purchase 	of
medallions, 	the 	Committee 	appears 	to 	recommend 	extension 	of 	the
License 	Commission's 	current 	policy 	that 	prohibits 	the 	owners 	of
a 	large 	number 	of 	medallions 	from 	purchasing 	additional
medallions. 	Further, 	the 	committee 	proposes 	to 	regulnte 	the

Mr. 	James 	T. 	McDavitt 	Page 	6
dispatch 	services 	for 	fairness, 	the participating 	cabs 	for
responsiveness 	to 	calls, 	an~ all 	parties 	for 	the 	division 	of
profits 	between 	drivers 	and 	medallion owners. 	Such 	a 	regulatory
approach 	will 	only 	iner~a8e the 	burden on 	the 	License 	Commission
without 	solving 	the 	und~rlyin9 problem of 	the 	concentration 	of
medallion 	ownership. 	S~ch an 	approaeh 	Is 	likely 	to 	be 	expensive
as 	well 	as 	ineffective.
~e 'enefits of DeregulationI
The 	problems 	of 	hi9h 	fares, 	poor 	service, 	and 	industry
concentration 	could 	all 	be 	effectively 	alleviated 	by 	open 	entry
and 	renewed 	fare 	competition. 	The 	radio-dispatched 	segment 	of
the 	industry, 	which 	represents 	most of 	Cambridge's 	ta,icab
demand, 	functions 	especially 	well 	vithout 	regulation. 	It 	would
be 	relatively 	easy 	for 	consumers 	to 	telephone 	and 	sample 	a 	number
of 	dispatch 	services 	to 	find 	the 	fare 	and 	quality-of-service 	mix
they 	prefer. 	With 	open 	entry 	and 	unregulated 	fares, 	therefore,
new 	radio 	dispatch 	services 	would have 	an 	incentive 	to 	organize
fleets 	with 	various 	fare 	and 	quality 	combinations 	responsive 	to
different 	groups 	of 	cO~8umers. 	Customers 	who 	received 	poor
service, 	and 	drivers 	w~o felt 	they were 	being 	treated 	unfairly,
could 	easily 	move 	to 	aqother 	dispatch 	service.
These 	benefits 	of 	deregulation 	are 	not 	mere 	hypotheses 	based
on 	an 	untested 	theory. 	For 	example, 	Seattle 	deregulated 	its
taxis 	in 	1979. 	We 	est*mate 	that 	betwee6 	1979 	and 	1983 	over 	200
new 	jobs 	for 	taxi 	driv~rs were 	created. 	Waiting 	times 	have
dropped 	because 	of 	the 	greater 	number 	of 	taxis 	on 	the 	streets. 9
Taxi 	fares 	in 	Seattle 	in 	1983 	were about 	15' 	lower 	than 	we
7 	The 	Chairman 	of 	the 	License 	Commission, 	Jam~s McDavitt, 	~
estimates 	that 	approximately 	two 	thirds 	of 	ta~ab service 	in 	v/
Cambridge 	is 	provided 	by 	cabs 	that 	subscribe 	to 	a 	radio 	dispatch
service.
8 	Zerbe, 	Seattle 	Taxis: 	Deregulation 	Bits 	a 	Pothole,
Regulation 	43,44 	Nov./Dec. 	1993, 	(copy 	attached) •
9 	Id. 	The 	only 	actual 	data 	we 	ha~e 	on ~aiting 	times 	come 	from
san-oTego. 	Following 	dereguJation 	there, 	the 	average 	waiting
time 	for 	radio 	dispatched 	cabs 	declined 	20% 	and 	the 	average
waiting 	time 	at 	major 	cab 	stands 	became 	negligible. 	Bureau 	of
Economies, 	supra 	note 	2, 	at 	117.

Mr. 	James 	T. 	McDavitt 	Page 	7
estimate 	they 	would 	have 	been 	under 	continued 	regulation. 10
The 	domination 	of 	the 	taxicab 	market 	by 	a 	few 	firms 	Is 	also
mitigated 	by 	deregulation. 	Virtually 	all 	cities 	that 	have
changed 	to 	open 	entry 	have 	also 	experienced 	an 	increase 	1n 	the
number 	of 	firms 	1n 	the 	taxi 	industry 	and 	a 	decrease 	in 	the 	market
shares 	of 	the 	largest 	firms. 	In 	some 	cities, 	entire 	new 	fleets
have 	entered 	the 	radio·-dispatched 	segment 	of 	the 	market. 	For
example, 	in 	Oakland, 	two 	new 	fleets 	entered 	with 	76 	and 	14 	cabs,
and 	in 	Sacramento, 	Portland, 	and 	Charlotte, 	new 	fleets 	entered
with 	27, 	15 	and 	14 	cabs, 	respectively. 	In 	Phoenix, 	new 	firms
accounted 	for 	20 	percent 	of 	radio-dispatch 	trips. 	In 	San 	Diego,
two 	small 	fleets 	expanded 	from 	23 	and 	12 	cabs 	to 	106 	and 	38 	cabs,
respectively. 	In 	most 	cities, 	there 	was 	also 	a 	signifilant
increase 	in 	the 	number 	of 	independent 	owner-operators.
Conclusion
At 	this 	juncture, 	the 	City 	of 	Cambridge 	faces 	a 	crucial
choice. 	It 	can, 	as 	the 	Advisory 	Committee 	suggests, 	enact
detailed 	new 	regUlations 	in 	an 	attempt 	to 	fix 	the 	problems 	caused
by 	the 	City's 	restriction of 	entry 	~nd 	its 	imposition 	of 	fixed
fares 	in 	the 	taxicab 	market. 	The 	City 	can 	raise 	fares 	to 	most
riders, 	leaving 	others 	with 	the 	current 	fares 	as 	-discount
fares,ft 	and 	attempt 	to 	monitor 	both 	taxicab 	service 	and 	the
conduct 	of 	dispatch 	services. 	However, 	such 	monitoring 	may 	be
difficult 	and 	costly 	to 	enforce 	and 	will 	not 	solve 	the 	underlying
problem 	caused 	by 	a 	lack 	of 	competition 	in 	the 	Cambridge 	taxicab
market. 	Alternatively, 	the 	City 	can 	choose 	to 	eliminate 	non-
safety-related 	entry 	restrictions 	and 	allow 	fares 	to 	be
discounted 	to 	all 	riders. 	If 	it 	chooses 	the 	latter 	course,
Cambridge 	will 	join 	the 	growing 	number 	of 	cities 	that 	have
recognized 	and 	obtained 	the 	benefits 	of 	competition 	in 	the
taxicab 	market.
10 	Evidence 	from 	1967-1979, 	a 	period 	when 	taxis 	were 	regUlated
in 	Seattle, 	suggests 	that 	price 	regulation 	increases 	cab 	fares
there 	by 	about 	11-15% 	Zerbe 	supra 	note 	8, 	at 	44.
11 	Although 	some 	of 	these 	independents 	subscribed 	to 	radio-
dispatching 	service 	(San 	Diego 	and 	Charlotte 	require 	that 	all
firms 	have 	radio-dispatching), 	most 	focused 	on 	cab 	stands,
including 	airport 	service. 	Bureau 	of 	Economics, 	supra 	note 	2, 	at
115.