CLIMATE CHANGE

The implication of Public Regulation on Ride-Hailing Competition

Five days ago the Friedrich Naumann Foundation in collaboration with Freedom Institute, Climate Institute and Suara Kebebasan held a public discussion on online transportation regulation and the role of smart mobility in reducing traffic congestion.  All arguments and statements of the discussion are summarized as below:  

The revised Transportation Ministerial Decree No.32/2016 is a classic example of a public regulation that generates more cost than benefits. The latter are shown for instance through an obligatory KIR test that ensure certain road safety standards are meet and the level of pollution are maintained under the environmental regulatory standards.

Another advantage of this public regulation is the fact that the ride-hailing business is acknowledge as a formal sector. In other words, the transition from informal sector to formal sector imposes ride-hailing business practitioners to pay taxes and in exchange they will receive a minimum protection from the government.

Furthermore, the government introduced floor and ceiling prices for car-hailing with the aim to avoid predatory pricing. Tariffs set by the online-transportation providers are more competitive than the conventional providers due to the fact that sources of profit of the online transportation providers are not merely base on providing transportation service, instead the main source of profit originates from selling applications.  Under this price range, conventional taxi providers are protected from the insolvency of competition and will save hundred-thousands of jobs.

At a glimpse, the revised decree tends to make both sides happy, but the essence of competition and the protection of consumers right have been neglected by the benevolent public regulators and hence making the regulation costlier than its benefits.

In a market competition where wellfare are generated, there will be always inevitable winners and losers for the betterment of society. The nature of competition will improve quality, reduces price, spurs innovation and creates jobs. By bringing forth the floor and ceiling price, the customer will pay a higher transportation cost and the price range adjustment will not reflect the real market price during peak hours.

Moreover, the limitation of vehicles set up by the public regulation is an economic barrier that comes with the cost of customers and limited the right of people to get equal job opportunities from the sharing economy platforms. In the absence of limitation, sharing economy platforms within the transportation sector such as Gojek, Uber and Grab have an enormous potential to create job opportunities than conventional transportation providers.

In theory, public regulation has a political rent-seeking characteristic, a knowledge gab regarding rapidly changing market conditions and a high transaction cost. These features will tighten bureaucracy, create market barriers, limit opportunities and diminish the right of a fair competition. Therefore, private regulation establishes by the ride-hailing providers especially for the sharing economy platforms needs to step in by building a reputation system and generate knowledge through a disposal feedback in the form of profit and loses in order to support innovation and maintain fair and square market competition.