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Opinion: Extending Uber pilot project will disadvantage future competition

The Montreal Gazette by Nura Jabagi 20 November 2018

In a move that upset the province’s taxi drivers, the new Coalition Avenir Québec government recently extended the Uber pilot project for a third year. On the one hand, the decision allows the government more time to study the effects of platform-mediated services (like Uber and AirBnB) on traditional businesses and how best to “level the playing field” between new entrants and incumbents. On the other, by extending the project, the government has further entrenched yet another monopoly, leaving Uber as the only ride-hailing service that can operate legally in Quebec.

Ironically, the longer this monopoly persists, the harder it will be for new competitors to enter the market, thus rendering some of the current studies moot. Due to the phenomenon of network effects, a platform becomes more attractive (and more valuable) as the number of users increases. Leveraged correctly, network effects can benefit digital platform businesses since a strong first-mover advantage often enables self-sustaining growth and impedes new players from entering the market.

Network effects make the de facto monopoly that Uber enjoys in Quebec particularly worrisome. Monopolies bring higher customer prices and leave companies with less incentive to innovate and provide quality serviceAs evidence, one need only remember Montreal’s pre-Uber-era taxi experience: expensive, second-rate, and often at the mercy of drivers’ whims.

Enter Uber Technologies Inc. in 2014. Within a year, the local taxi industry made significant strides toward modernization, with the introduction of Téo Taxi and with Taxi Diamond offering an app with Uber-esque functionalities. Similarly, Ontarians are now benefitting from discounts and better driver commissions as recently arrived Lyft seeks to attract riders and drivers to its platform, and Uber fights to protect its market position.

What does this all mean for Quebec? Certainly, allowing Uber to operate as a monopoly for another year only stands to further strengthen its network effects. While a well-capitalized entrant (like Lyft) could challenge Uber, aggressive price-cutting can only go so far — particularly given that both companies are gearing up for IPOs next year and amid rising concerns about the treatment of workers in the gig economy.

Considering that Uber and Lyft will tend to operate at similar price-points, and multi-homing (the ability for users to simultaneously use both platforms) is a common practice, network effects should dissipate over the long term once ride-hailing companies get average ride wait-times low enough. This would leave Uber, Lyft, and any other ride-hailing platforms the province might eventually welcome to compete on brand differentiation. However, this may be difficult considering that ride-hailing companies offer seemingly undifferentiated services, and the technologies upon which they depend are easily reproduced.

Although some brands with relatively undifferentiated offerings have been successful in garnering significant customer loyalty (think Pepsi and Coke), building a consistently branded, quality experience is no small feat considering that riders rarely have the same driver twice, and ride-sharing companies have limited control over independent drivers.

In this context, a homegrown solution might present an attractive point of differentiation. This is eminently feasible given that Taxi Diamond’s app was created by local developers. Moreover, as ride-hailing aggregators (apps that help riders find the cheapest fare) continue to emerge, new and smaller competitors can more easily gain the exposure needed to penetrate the market. As the success of Téo Taxi has shown, customers are willing to pay a premium for a differentiated homegrown app-based service, even in a particularly price sensitive market.

Considering Montreal’s efforts to become a global hub for entrepreneurial and technological activity, it’s time to rethink this government-sanctioned monopoly, open the market to competition, and promote local players. Tax dollars from ride-hailing services can be used to support taxi drivers and modernize that dying industry, as well as prop up our financially strapped transit system.

Nura Jabagi, MBA, is a doctoral candidate in Business Technology Management and a Public Scholar at Concordia University.