As Addison Lee announces price cuts, the taxi battle between Uber and London's black cabs shows perfect market competition is a long way off

 
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London's taxi market is distorted by imbalances in regulation (Source: Getty)

The idea of perfect market competition has exercised the minds of economists for centuries. In theory it would feature the presence of multiple small sellers; a homogenous product; an inability for any one firm to influence the price and; complete information.

On this set of criteria, how does the London taxi and private hire market stack up? There are certainly plenty of small sellers, many of whom are self-employed. The product is similar but with wild variations, the price can't be controlled by one seller and, finally, the customer has access to a great deal (if not a perfect amount) of information on price and quality. Far from perfect competition, then.

Furthermore, while they compete for the same business as private hire vehicles black cabs enjoy special privileges, such as access to bus lanes. They are also subject to stringent regulation and external costs.

This paper has argued previously for a reduction in the costs and regulations in order to go some way towards a level playing field, but a vocal section of the black cab trade view any such efforts as “a race to the bottom”. For now, they can have it their way.

The good news is that, as Hayek said, “we should worry much less about whether competition in a given case is perfect and worry more whether there is competition at all". On this criteria, the market works pretty well.

By way of evidence, look at the announcement yesterday from Addison Lee chief executive Andy Boland. The minicab firm is slashing its prices by a third during off-peak times and at weekends.

In an interview with this newspaper, Boland said recently that when it comes to dealing with rival Uber, he intends to “compete, not complain” - and he's certainly delivering on that pledge. According to Boland, passengers have said that reduced off-peak fares “would considerably increase their use of Addison Lee.”

This is hardly surprising. After all, it's the low cost of an Uber compared to a black cab that has seen the Californian-import rise to such prominence in the capital. However, for as long as the market as a whole remains distorted by imbalances in regulation and protection, perfect competition will remain as elusive as ever.

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