ARE EXCLUSIVE TAXI STANDS GOOD OR BAD?

© by Gary J. Mac Donald
Internet: ar075@freenet.carleton.ca

Economic Analysis and Communication
91 Glenview Avenue
Ottawa, Ontario, K1S 1M2

© Copyright 1994 and 1998. This paper may not be reproduced in whole or in part, by any means, without the express written permission of Gary J. Mac Donald, e-mail: ar075@freenet.carleton.ca

This paper was originally written for the 1994 Conference of the International Association of Transportation Regulators. I thank Yvan Gregoire for his feedback to the original concept for this paper, and for providing additional information about taxi stands and hotels. Dan Hara provided additional comments. Responsibility for any remaining errors of fact or analysis is mine alone.

In the years since I wrote this paper, further observation of the taxi industry in a number of cities has only served to reinforce my initial conclusions. I can add two points:


Abstract

This paper gives a brief analysis of exclusive taxi stands. The idea that exclusive stands are bad, because they restrict licensed operators and result in payments outside the industry for no benefit, is compared with the view that they are good since they allow some measure of consumer choice, via the agent of the site owner, and because they reward fleet operators who invest in providing higher quality. It is found that, in general, exclusive stands are good since they help consumers get the service they want. There is also a benefit to the community since the higher quality taxicabs are also available to serve other customers. Over the long term, exclusive stands help to upgrade the quality of drivers because they reduce the opportunities for less skilled drivers who often populate stands. These benefits can be realized if either the site operators care about the quality of service offered, or the average quality offered in the absence of exclusive stands is below that which customers desire.

Exclusive taxi stands are sometimes a bone of contention in the taxicab industry. This paper provides a brief discussion of the main points to consider when deciding whether these are bones worth chewing.


1. INTRODUCTION

This paper is intended to provide a brief overview of the issue of private stands, rather than an exhaustive analysis. This introduction provides definitions for different kinds of stands, and the regulator's jurisdiction over them. It concludes with an outline of the succeeding sections.

A taxi stand is a place where taxis wait for customers, and occasionally where customers wait for taxis. It may sometimes be useful to think of a stand as having two parts: the part where the taxi parks to wait for a fare, and the place where the customer actually gets into the cab. These are often the same place, but not necessarily.

While stands can take many forms, this paper is concerned with those where taxis line up to wait for customers, particularly at high-demand points such as transportation terminals, hotels, or other such locations. The area where cabs park may be located on private or public land. If on public land, then it is normally open to any taxi licensed to operate in that area. If it is on private land, then the land owner may decide to sell the right to park or "stand" there to wait for fares to one taxi company. Similarly, if the place where passengers actually enter the cab is on public property then it should be open to all licensed taxis, but if it is on private property then the property owner may be able to sell the right to pick up passengers to a particular taxi company.

This paper is concerned with private stands, those which have one or both parts on private property, and whether contracts to limit them to one company are good or bad for the community. The discussions which follow will treat stands as if the two parts are together, except as otherwise noted under the regulator's jurisdiction.

Section 2 presents the key considerations in the conventional viewpoints of whether exclusive stands are good or bad, and examines why these stands may be worthy of a regulator's attention. Section 3 then follows with analysis of those factors. The final section reviews the general conclusions, and relates the theoretical findings of this paper to some practical circumstances.

2. THE PROBLEM

Why is a private contract, between willing parties and covering events on private property, a matter for public concern and sometimes prohibition? The answer lies in the possible effects on the taxicab industry. Aside from a solid agnosticism on the issue, there are two contrasting views of private concessions for taxi stands, each of which may be characterized in a couple of key issues.

First is the view that exclusive stands are bad for the industry. This view suggests that it is wrong to allow some taxis to be excluded from some of the business. After all, they all pay the same license fees, pass the same inspections, and so on. And furthermore, why should taxi operators have to pay someone outside the industry for the privilege of doing that which they are licensed to do? They are licensed to provide taxi service and should not have to share the profits with anyone else.

This "bad" view of exclusive stands can be discussed in the answers to two questions:

On the other hand, exclusive stands may be good for taxi service in the community. They allow someone to screen taxis and/or companies which serve customers at a given place. This is potentially better for consumers -than having to take the first car in line, however good or bad. And, if a taxi operator invests in providing higher quality service in order to win exclusive stand contracts, it will allow him to earn a return on that investment by excluding lower quality operators and reserving a stream of customers who prefer the better quality service.

The "good" view of exclusive stands can be discussed in the answers to two more questions:

Even with these differing views, should regulators care? The answer depends on the regulator's range of responsibilities for the industry and the public good. If the regulator is concerned only with licensing and inspections, then there may be no interest in the matter of exclusive stands. On the other hand, if the regulator is concerned with the overall health of the industry, or with the quality of service delivered to the public, then exclusive stands are of interest. This paper assumes that most regulators fall into this latter category.

Exclusive stands clearly affect how some customers are served and how some taxis are able to operate, and are thus of potential concern for regulators. Within the scope of their jurisdiction, they can consider how exclusive stands affect service both at those stands and in the community at large. Local conditions will affect the way in which exclusive stands affect the taxi industry itself and this too should be considered by the regulator.

The next section of the paper will discuss the four questions in detail.

3. EXCLUSIVE STANDS: GOOD OR BAD?

The opposing points of view are discussed here under the four questions identified in the preceding section.

3.1 Do Exclusive Stands Milk the Taxi Industry?

The simple answer is yes, in that the industry has to pay someone outside the industry. Whether the amount is unfair or extortionate in any way, or much different from what would happen in the absence of a stand contract, is another matter.

The first item to consider is the alternative: if exclusive stands are not allowed, how will stands work? Alternative organizations, often informal, will arise to help consumers get the taxis they want. Where the hotel or other establishment has a doorman or other attendant who can monitor the pickup of passengers by taxis. Then, instead of the taxi company paying the hotel, taxi drivers may pay the doorman for access to the best trips. These payments are considered bribes by some, tips by others. The lucky doorman can also collect tips from passengers, grateful for being saved from the worst of the taxis. This model operates at many hotels. It has the potential drawback, suggested at the (then) NATR conference in Orlando last year (1993), that those drivers best able to tip the doorman may be those who do not keep up with their maintenance.

These informal systems have the drawback that they are not transparent to either customers or drivers. Those who know how the system works may be relatively well served, but others will not be.

Exclusive stands thus provide a different organization from that which might exist, but not necessarily one where taxis do not have to pay for access to choice trips.

The second item to note is that whatever the regime, no operator will pay more than the expected value of profits (above and beyond a normal rate of return) to be earned from the stream of customers generated by the stand. Thus we might expect to see higher prices paid for stands which would be expected to generate relatively more "good" trips such as airporters, and higher tipping customers such as business travellers. These are the same customers who are sought after in a tip-based system. Thus hotels can expect to get more for their stands than shopping malls or grocery stores even if they generate a similar number of trips. A taxi company could consider stand costs as analogous to advertising in that they get customers into their taxis rather than their competitors' taxis.

If there is a stream -of good customers originating from a single point, taxis will swarm around to get in on the action. However, the establishment which produces the stream of customers will also seek ways to both protect its customer base and claim a share of the profits generated by the stream of business it creates.

This gives cab companies the opportunity to offer service instead of cash to the site owner. This is indirect, since the service will be delivered to the customers, but it is important to note that they are also the site owner's customers, and the owner has an interest in their continued happiness. A hotel collects hundreds of dollars from each customer, and has an interest in repeat business from those customers. Even a few customers who choose a competing hotel because of the availability of better transportation service will erase any financial gain from sell the stand rights. On the other hand, taxi operators know their cost structures better than the hoteliers, and can probably reduce their dollar offers by more than it costs to provide enhanced service.

3.2 Are Licensed Taxis Unfairly Excluded From Business By Exclusive Stands?

Any fleet operator, or co-operative of independents, can usually compete for a stand. That said, in some cities the organization of the taxi industry may be such that stands could constitute a barrier to entry of new companies since it may be difficult to win enough contracts to enter at an efficient scale of operations. This is particularly true if the entering company must buy a relatively large share of its business through stands, since it is likely to be less well known and thus receive less of the telephone trade.

An exclusive stand simply distributes the business in a different way than would be the case if the stand were open to all taxis. The total business available is not reduced, and may in fact be increased if alternatives to taxi service are used less by the site owner. In addition, a concessionaire offering higher quality service may in fact increase -taxi business by showing how good service can be, rather than driving people away from taxis as may happen with very poor quality taxi service.

3.3 Are Exclusive Stands A Way In Which Consumer Choice Is Exercised?

Yes, although indirectly through the agency of the hotel or other site operator. If a stand is open to all taxicabs, the customer is stuck with the first cab in the line. (Or else an argument to get the preferred cab to accept the trip.) Thus the customer can expect to get the average quality of taxi from a public stand. On the other hand, at an exclusive stand, the customer can be given the average of cabs from a company selected by the site owner. These taxis may be chosen for various characteristics, but as long as the site owner has an interest in happy customers the choice should be better than the overall average1.

Thus exclusive stands help to address one of the problems facing the taxicab industry and its regulation, the fact that this exercise of choice is relatively rare. Customers at a stand or hailing on the street generally have to take the first cab they find, regardless of quality. It is only when choosing a company to call for telephone dispatch that they are able to make any choice, and even then it is between dispatch companies and not individual taxicabs. The exception to this is where cellular telephones are allowed. In those cases, individual operators are able to offer personalized service in the expectation of return calls in the future.

This benefit is further enhanced if the site owner retains and exercises the authority to reject any taxicab and/or driver which does not meet the desired standard. It is reduced if the owner is more interested in getting a -large concession fee than in enhancing the package of services offered to customers and reducing complaints.

3.4 Do Exclusive Stands Reward Investments in Better Service by Fleet Operators?

Potentially. Yes, if the site owner is concerned about quality. Taxi operators which offer better service are more likely to be chosen for these contracts. In addition, they are more likely to generate repeat business from happy customers, thus further amortizing the cost of quality. The availability of higher quality taxi service will spill over to the community, increasing the quality of service for all taxi users. If the quality of service generally available is below that desired by customers at the exclusive stand, that would induce a concessionaire to invest in quality in order to maximize returns on the money invested in buying access to the stand.

4. CONCLUSIONS

In this paper, our conclusion -is that exclusive stands are generally good for the taxi industry and for the community. Whether exclusive stands are perceived as good or bad depends on how the outcomes discussed above are regarded by the regulator, which in turn depends on the regulator 5 view of how the industry should operate.

The answers to the questions in the preceding section suggest that exclusive stands are, in general, good for taxi service. We can expect that they will tend to raise the quality of service offered. It is sufficient that site owners be concerned about quality. It would also be sufficient if the quality was higher than that generally available.

Exclusive stands are bad in the view of the regulator who believes that all taxicabs are equal and offer the same quality of vehicle, driver and service. Thus there is no benefit to exclusive stands, they simply drain funds form the industry and restrict drivers' access to customers for no good reason. A stronger statement of this view would go further to say that the taxi licence entitles the operator to equal access to all fares, as long as the minimum standards are met and inspections passed. This model relies on enforcement and the operators to maintain quality standards.

Exclusive stands are good if some taxicabs and some drivers may be better or worse than others, and as a result customers may be better served by some than by others. Under this view, exclusive stands are good because they exploit those differences and increase the reward to offering better service, something which does not always happen in the taxicab industry. This model relies on competition to reinforce regulation.

Which of these two views should prevail is to some degree a matter of opinion, however the latter view more closely parallels reality for most communities, in that all taxicabs are not equal. To treat them as if they are is to go beyond licensing and minimum standards to attempt to regulate equality of outcome for participants in the industry. It seems more reasonable to provide equal opportunity through licensing and inspection, and allow operators to compete freely for business. If that view is accepted, then exclusive stands are generally -good for the industry.

A vital point is that public stands normally attract lower quality taxicabs, or at least less skilled and knowledgeable drivers. This is because they can simply wait their turn and get fares, whereas more skilled drivers can work the streets and dispatch calls to earn a higher income.2 Allowing the property owner to screen cabs operating at the stand, through a contract, can open the stand to the better drivers. Otherwise they will often leave it to those drivers who do less well on the streets, and so are more willing to wait for a fare. Indeed, an exclusive stand with higher quality service may have a shorter line of taxis waiting since the drivers value their time more highly than the less skilled drivers who typically populate open stands, and thus are not willing to queue for such long periods of time.

The fact that poor taxis usually crowd out the better ones at public stands, and that this can - be reversed at exclusive stands, is a major point in favour of allowing, and even encouraging, exclusive stands. As described above, exclusive stands are likely to provide improved service both at the stands themselves and for the community at large, since the taxicabs which are upgraded to service the exclusive stand also serve other users. There may also be a longer term effect as less-skilled drivers find that exclusion from some stands reduces their income and they leave the industry. This would lead to a gradual increase in the average quality of drivers in the industry.

4.1 Conclusions True in Theory and Practice

The foregoing discussion was theoretical, but how does that compare with reality? It is easy to see that, as suggested, taxis are not all alike, but what about the way in which stands operate? Do site owners care about quality?

We know of no systematic survey on this issue, but there is certainly anecdotal evidence as related in preceding footnotes. Conversations with members of the hospitality industry suggest that hoteliers, at least, view exclusive taxi stands as a way to extend their quality of service. They have customers who pay large sums, often hundreds of dollars per day, to be treated well. Those customers, and their patronage, are worth a lot to the hotels, and they want to look after them. They want to be sure that the taxi the hotel's doorman puts the customer into will be clean and safe, with a good driver.

There are other examples:

These items suggest that there is a role for exclusive stands in the taxi industry. Local conditions may affect the value of exclusive stands to a particular community, but in general they can be useful. The role, if any, of the regulatory agency in encouraging them is unclear, but one possible avenue would be to offer some key contract language as a precedent, which could be used or amended as desired.

The ultimate role of the regulator is to provide for the optimum level of service to the community, at rates that are fair and reasonable to all parties. Exclusive stands are a simple, market-driven tool which can be used to support that objective.


FOOTNOTES

1 About half of the major hotels in Montreal have exclusive stands. Their contracts are typically quite detailed, and can include quality-related details such as age and length of car, and driver dress, languages, -knowledge, and behaviour. They may even specify that drivers are to help customers with luggage.

2 It has been noticed that in some cities, taxis of certain companies, usually identified as providing better service to clients, are known to not serve the airport stand because they earn more by working the streets and dispatch. This has been confirmed by taxi company owners. One reported being slightly puzzled while watching his companies' cars arriving at the airport full, and quickly leaving empty. At the same time, he saw others, whether empty or full arriving, leaving full some time later after waiting through the taxi line.


© Copyright 1994 and 1998 Gary J. Mac Donald ar075@freenet.carleton.ca


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