John Phelan is an Economist at Center of the American Experiment.
Barriers to Entry as Baseball Bats
Government is largely the art of whacking your knees with a baseball bat, handing you a Band Aid, and asking you to remember the Band Aid next polling day. Minnesota – a reliable source – provides an example.
In March, Minneapolis City Council issued an ordinance establishing minimum pay rates for rideshare drivers. Lyft announced that it would cease services in the city and Uber that it would withdraw from the entire Twin Cities metro. Local media reported that alternative services were waiting to fill the gap. But, as the days rolled by, they kept waiting.
The Minnesota Reformer reported:
…nearly two months after the City Council passed those rates — delaying enactment until May 1 and then July 1 — just two transportation network companies are operational in the city: Uber and Lyft.
Why? Because of “barriers to entry” which your textbook might define as “Obstacles that limit the freedom of potential rivals to enter and compete in an industry or market.”
Here, these barriers take the form of fees and regulations:
Just one potential competitor — MyWeels (with no ‘h’) — became licensed in Minneapolis on Wednesday after paying the city’s annual fee of $37,145 plus $10,615 for a “wheelchair surcharge.” MyWeels is also the only ride-hail alternative to be licensed in St. Paul after paying its annual fee of $41,115. Three companies — MyWeels, Moov and Twin City Taxi — have applied to operate at the Minneapolis-St. Paul International Airport, which has a licensing fee of $500.
MyWeels founder Elam Baer… said what set him apart from the others was his access to capital — not some new proprietary technology or the allegiance of hundreds of drivers.
…
Finding investors is the main test for Uber and Lyft alternatives. In addition to operating licenses for Minneapolis, St. Paul and the airport, transportation network companies need to carry commercial insurance for their drivers with premiums running around $150,000 per year.
Joiryde CEO David Linhardt said he dropped out of the race to enter the Twin Cities because of the “excessive licensing fees and lack of clarity on insurance costs and coverage requirements.”
The saga – which derailed the state’s legislative session – was resolved, for now, by the state enacting minimum rates of pay for rideshare drivers below those proposed by Minneapolis City Council: Uber and Lyft will remain in Minnesota.
What of those alternative services? The Pioneer Press reports:
Wridz, which operates in nine states, has yet to complete a license application with the city of St. Paul, though [chief executive Steve] Wright said Thursday the company is hopeful its paperwork will be in order by June 1.
“It sounds like they have every intention of getting things through quickly,” Wright said Thursday. “Between the two cities and the airport, it’s $100,000 in licensing fees that we dropped to get into this market. I’m in 23 regions, and that’s the highest I’ve ever seen.”
The lack of license prevents the company from performing authorized passenger pick-ups in St. Paul. The app indicated Thursday to “please try again once this region becomes active.”
It was unclear Thursday if a lack of license also bars the company from doing passenger drop-offs in St. Paul…
…
…getting MOOV rolling has had its challenges — most notably the licensing and related application fees of around $37,000 in Minneapolis and $41,000 in St. Paul.
Unlike St. Paul, Minneapolis has at least begun the review process for [MOOV founder Murid Amini’s] license while he works out a payment plan, he said. He’d been in talks since March with the St. Paul Department of Safety and Inspections, he said, and finally reached an agreement May 7.
“They said, ‘OK fine, we’ll take half upfront,’” said Amini, who still is fundraising to come up with the money.
“Technically, I can launch in the suburbs right now,” he added. “I just don’t want to because people will look for rides in Minneapolis and St. Paul, and I don’t want to say we don’t serve this area. At the airport, we’re in the middle of processing our application. We hope to get that done in the next couple weeks.”
A supposed increase in market “concentration” where, as an article for the Chicago Booth Review put it, “many industries have grown more concentrated—such that bigger companies (not just the giants) make up an increasingly larger share of the economy” is a current economic bugaboo. As the example of rideshares in the Twin Cities shows, the role of government in generating this phenomenon should not be overlooked and suggestions that government action can fix a situation it created should be treated with skepticism.
But these are not the only alternative services. In March, one state senator suggested – or should that be ‘threatened’ – “a state-run/developed Rideshare app.” Remember who gave you that Band Aid next polling day.