Singapore’s existing private transportation is primarily ruled by the taxi firm ComfortDelgro that controls more than 80% of total taxis in Singapore. In 2014, the government permitted the entry of Grab followed by Uber into the private transportation market. Uber and Grab are ride-hailing services that offer similar services as Comfort but have offered cheaper prices therefore, have acquired a large consumer base. However, the extent to which the market has become more competitive has to be analyzed, hence: To what extent has the private transportation industry become more competitive following the entry of Grab and Uber?
This research therefore aims to investigate the factors that determine competition in a market with the primary focus on how the market structure of the private transportation industry has changed. The reason why this has primarily been chosen the market structure is one of the main determinants of the market power of the firms therefore whether there has been a change or not can help determine the extent of the competition. Furthermore, the price competition engaged by the three firms will also be investigated because Uber and Grab have significantly influenced pricing strategies for Comfort because of the introduction of surcharge pricing. Since all three firms to some extent engage in the same level of non-price competition, the overall effect this has had on competition isn’t as significant and will therefore not be addressed.
Furthermore, a method of measuring the degree of competition is through a consumer surplus analysis. This is because, theoretically, when competition in a market increases, consumers benefit and a consumer surplus analysis, the extent to which consumers benefit can be analyzed hence whether the market has become more competitive or not. Efficiency and competition are two concepts that are linked in economics therefore, efficiency in terms of allocative efficiency, productive efficiency will also be investigated to determine whether the market has become more competitive.
Competition is a key aspect in Economics, as it drives efficient resource allocation which is once again key because of the basic economic problem of scarcity. Scarcity addresses how we can address our infinite needs and wants with the finite resources available therefore, by making the best possible use of resources which can be achieved through competition. In this industry in specific, originally, the market was mainly dominated by ComfortDelgro that charged higher prices therefore, promoting inefficiencies however Uber and Grab have pushed towards employing more competitive transportation. By investigating the introduction of Uber and Grab and the extent to which the industry has become more competitive, the real benefit derived by the Singaporean economy in the long run can be analyzed.
The first primary source consulted was an interview with a taxi driver, Steven Ng who has been working with ComfortDelgro Singapore for 20 years. This interview was conducted to acquire a greater understanding of how the rental and operation of taxis and ride-hailing services work and what procedures are used. This has been used because it formed the basis of what I had to research when looking at the barriers to entry or looking into the market structure of the economy.
The second primary source that will be used is an interview conducted with a transport analysis in Singapore about the current competition the firms engaged in and the future implications for Singapore. This was conducted to learn more about the implications or potential implications Uber and Grab will have on the Singaporean economy from an expert’s perspective. This source was consulted as I was given a better structure for my essay, in other words, how I could develop my arguments and what developments I could use.
Several secondary sources have been consulted with a primary focus on peer reviewed journals and academic books. One of the main peer review journal that is being used is “USING BIG DATA TO ESTIMATE CONSUMER SURPLUS: THE CASE OF UBER” because of the relevant and current data that is provided on Uber and consumer surplus in specific as well as, providing sample calculations.
In addition to this, there is research that is conducted on efficiency for instance, the number of miles travelled by Uber drivers with a passenger in their car. The purpose of this source is that all the research conducted is current and relevant to the specific research question.
The second important secondary source used was a research “paper” written by Deloitte for Uber in Australia. This was because. I found useful information on how consumer surplus changes according to elasticity and it also introduced this idea of how elasticities change throughout the day as the PED for Uber in Australia changes. This formed the basis of the graphs created with varying elasticities that were useful in not only explaining how surcharge pricing worked but also understanding surcharge pricing.
Interview with Taxi Driver:
From the interview with a taxi driver, Mr. Ng, the number of taxis were found to be 28,000 while there are more than 30,000 Uber/Grab cars. Renting an Uber or Grab car is close to $50 per day while a Comfort car is $100. Taxi drivers also have to pay a larger road tax in comparison to Uber/Grab cars. There seems to be no government regulation that is being used as anyone can rent a car and be a part of the ride-hailing service and, the government has more control over taxi meters for Comfort therefore monitors the pricing and fares while for Uber and Grab this isn’t the case. Uber drivers also earn more than taxi drivers, close to 20% of the fare. In addition, Mr. Ng said that there are far more incentives for Uber Grab users and drivers. There was also some concern he raised over the age of Uber/Grab as they are all young and inexperienced because the minimum legal requirement of being an Uber/Grab driver is to hold a license for at least 2 years while comfort taxi drivers undergo much more training.
Interview with Transport Analysis
This interview provided me with insight into the actions the government has been taking in order to allow firms such as Uber and Grab to enter the market. He said that the government has changed around regulations making it easier for new firms to enter the market for instance, initially, in order to be a taxi company, 1000 cars were required as a minimum fleet size but because of deregulation, firms just require 1-2 cars in their fleet size. He said Uber/Grab offer cheaper prices but suggested that this may lead them to experience losses because they’re currently not profitable. He also suggested that Singapore may be experiencing an increase in traffic because of the increased rides and therefore, increased cars on the road.
Figure 1 shows the annual population of rental cars and taxis in Singapore. Rental cars have experienced a sharp increase since the entry of Uber and Grab while Taxis have been on a steady but not drastic, decline. (Appendix 3.1). Both Uber and Grab act as car rental firms in Singapore with Uber as Lim City and Grab as Grab Rentals therefore, drivers to not need to own a car to become an Uber/Grab driver.
The taxi fleet for ComfortDelgro in 2013, before the entry of Uber and Grab is, 12313 and the total number of taxis is 277782. Figure 2 shows the different fleet sizes for the different firms where the area in orange (60%) is Comfort Delgro. Since ComfortDelgro also controls CityCab Taxis, their fleet size has been included as well there, Comfort’s fleet size is 16844. (Appendix 3.2)
Figure 3 shows the fleet sizes for Taxi firms, Uber and Grab in 2015. The area in grey (47%) is the fleet size for rental cars, the area in blue (27%) is Comfort’s fleet size while the area in orange (26%) is the fleet size of the other taxi firms. (Appendix 3.3).
For the same trip, from the Central Business District (CBD) in Singapore to PasirRis and at the same time of the day: 3pm Singapore time, prices fluctuate from $14-19.50 with Comfort charging the highest price and the new entrants charging relatively low prices. This pricing strategy is known as penetration pricing where a relatively low price is charged by new entrants into a market in order to “rapidly penetrate the market”.
Another pricing strategy employed is surcharge pricing which can be extended further to partitioned pricing where the price of a good or in this case, the price of a ride is divided into two parts. The price of a ride is presented to consumers in an all-inclusive flat fare which changes based on the time of day therefore, the demand for rides.
The estimated consumer surplus for Uber is $2.88bn which is 6x the revenue earned by Uber in the US with consumer surplus 1.57x the value of consumer expenditure. It represents the local demand and supply for Uber in the US and takes into account 50 million UberX consumers. As a result, for every $1 spent on Uber rides in the US, consumers receive $1.57 in return. It was further estimated that consumers would experience a loss of $18bn if Uber was to leave the US market. Further research on Uber and consumer surplus in Australia shows that UberX has generated a consumer surplus between AUS$54 to AUS$127 million.
It was estimated that for taxi drivers in Los Angeles, they have a passenger in their car for 40.7% of the miles that they drive while for UberX, this s higher as Ubers have a passenger for 62.4% of the miles they travel. They also have a higher capacity utilization rate of 58% while for Taxis, this was near 38.6 to 42.8%.
Uber in the first quarter of 2017 gained a profit of US$3.4bn in Singapore while incurring a loss of US$708 million. Similarly, ComfortDelgro gained a profit of SGD$113 while incurring a loss of SGD$871.5 in the first quarter of 2017. Because of difficulties in obtaining profit loss data for Grab in 2017 data will be used from Grab in 2015. In 2014/2015, Grab gained a revenue of US$10.2 million while incurring a net loss of – US$39.8.
Figure 9 shows a steady decline in the annual population of total number of motor vehicles including rental cars, cars and taxis.
A monopoly is a market structure characterized by a single and dominant firm with significant barriers to entry and significant control over price, selling a unique good. This has been shown in the market for private transportation before the introduction of Uber and Grab therefore, when ComfortDelgro was one of the main private transportation services. As seen from Figure 1, in 2013, before the introduction of Uber/Grab, the number of taxis was close to 28,000 taxis. As per Figure 2, it can be seen that 60% of the taxis were owned by ComfortDelgro and as a result, Comfort had significant market power. This information of fleet size is from a website owned and controlled by the government in Singapore and is mainly factual therefore, is a reliable source of information furthermore, Figure 2 is from another government sponsored website, Land Transport Authority thus reliable information as well.
In addition, to significant control over fleet size, there were significant barriers to entry as well. Barriers to entry are the characteristics of a market that make it difficult for new entrants to enter the market such as, economies of scale, legal barriers and branding. As per the transport analysis, originally in order for a firm to set up a taxi service, a fleet size of 1000 was a minimum legal requirement which posed as a significant barrier to entry. The concept of a minimum fleet size requirement has been supported by the research conducted by Mr. Tien Fang Fwa from the National University of Singapore. He stated that the minimum size required was in fact 400 taxis and not a 1000. This information is more reliable as it is research conducted by a reputed university in Singapore and is part of a peer review process. However, both sources confirmed the existence of a minimum fleet size which did act as a significant barrier to entry.
Following the entry of Uber and Grab, the market structure seemed to have moved away from a Monopoly with one dominant firm to an Oligopoly. An oligopoly is a market structure characterized by a small number of large interdependent firms that sell homogenous or differentiated products with high barriers to entry but not significant enough as monopolies. This has been shown in Figure 3 because, in 2015, when Uber and Grab were beginning to become significant competitors, rental cars were close to 30,000 while taxis were close to 30,000 as well, out of which 16000 were ComfortDelgro Taxis. Therefore, the top three firms owned around 70% of the fleet size therefore, an Oligopolistic market structure. However, the statistics don’t distinguish between the use of the rental cars therefore, not all rental cars may have been used for Uber and Grab. It is also assumed that most if not all of Uber and Grab cars are rentals which is also not accurate as drivers can use their own cars.
This market structure is also reinforced by the fall in barriers to entry into the market. Initially, a minimum fleet size of 400 was required however, as per the interview with the Transport Analysis, firms now only require 1-2 cars. This however, was not supported by research conducted by Fwa as he stated that a minimum of 100 were still required for new entrants. However, in comparison to the original minimum of 400, barriers to entry have been reduced.
Therefore, the market has changed from an original monopoly to an oligopolistic market as evidenced by the change in market power as measured through fleet size and the change in barriers to entry. An oligopoly is more competitive as taxi services are not homogenous but rather have close substitutes of Uber and Grab therefore, the market for private transportation has become more competitive.
In the academic study by Martin Spann on the implications of price competition in the market for digital cameras in Germany, he found that new entrants into a market that employed penetration pricing led the market to face a decline in the prices of digital cameras with the mean price falling by 46%. This can also be seen from Figure 4 as the new entrants Uber (U) and Grab (G) charge prices significantly lower than Comfort (C) resulting in different prices level, from $14-19.50 for the same quantity of rides at Q1.
As per research conducted by //, an increase in market competition is often followed by a fall in prices as more “competitive pressure” leads to “price reductions”. Therefore, a price reduction must be a signal of an increase in competition.
However, the study conducted by Spann was for a different market and for a different country therefore, the same outcome may not be applicable however, from Figure 4, prices of the same service for the same quantity have fallen therefore, following the entry of Uber and Grab and the use of penetration pricing, the market has become more competitive.
Surcharge pricing, the second price competition that the three firms engage in is because of the differing price elasticity of demand for rides throughout the day. The price elasticity of demand is a measure of the responsiveness of consumer demand to a change in the price of the good/service. For instance, in the mornings, the demand for rides is relatively inelastic because of the determinant of time as consumers do not have a large time to respond. Furthermore, this being office hours, there is a greater number of potential buyers of the ride thus a larger shift in the demand curve as seen from Figure 4. Hence, if looked at Uber, there is a greater price change or greater “surge”. The similar applies for Figure 6 where the timing is during the evening. The afternoons have a relatively elastic demand because people have greater time to respond and there is also a relatively lower number of buyers hence the surcharge isn’t as drastic and therefore, a lower price change as shown in Figure 5.
This idea that fares change based on the time of day was supported by Cohen in his academic paper where he suggested that the elasticity for Uber is relatively inelastic at -0.6 and this elasticity changes throughout the day therefore, different surcharges throughout the day. From this, different demand and supply diagrams can be made as seen from Figures 4,5 and 6. As this is a peer reviewed journal, the information is reliable however, this data was only computed for Uber and for the US market. Singapore has a different transportation market because there is a large influence of the taxi industry as well therefore, the elasticity value may not be applicable but the idea of different elasticities throughout the day is applicable.
Hence surcharge pricing can be viewed as beneficial because as per Kaitlin Daniels and her paper as consumers who are willing to pay higher prices for surcharge, they will get a ride which they may not have achieved through flat fares. This increases competition in the market as before, with a limited supply of taxis, not all demand would be satisfied however, with surcharge pricing, consumers who are willing and able to pay are able to get a ride. Although this journal focuses on the US market, the same can be applicable to Singapore as before the introduction of Uber and Grab, there were no close substitutes therefore during times of high demand, not all demand was satisfied however, with new entrants and the introduction of new substitutes, the market has become more competitive.
If a market becomes more competitive, consumer welfare increases as exemplified in the academic journal written by Suryaprakash Misra where he stated and researched that consumer surplus is “greatest in magnitude in the market structure of perfect competition” where there is a high degree of competition. Consumer surplus is the extra benefit derived by consumers when they pay a price for a good or service, lower than the maximum price they’re willing and able to pay. Therefore, greater competition results in greater consumer surplus. This is supported through research conducted by Deloitte in Australia where they found UberX contributed $49.6 million as consumer surplus every year. This is also supported by Cohen and his paper where he researched that consumers receive $1.57 in consumer surplus for every $1 of expenditure because of UberX. Both these statistics are from peer reviewed sources and are therefore reliable and recent. Furthermore, Cohen states that consumers would lose $18bn in consumer surplus. It should be noted that this is only applicable to the respective countries and their markets and only account for Uber therefore, different elasticities and different non-determinants of demand result in perhaps different consumer surplus values. However, nevertheless, if consumers gain consumer surplus, as per Misra and his findings, this means competition has increased. Although his is applicable to monopoly to a monopolistic competition, it can also be seen for an oligopoly from a monopoly. Consumer surplus increases because aside from lower prices, Uber and Grab offer differentiated services for instance, giving a fare upfront or including waiting time as well as GPS devices.
However, there is a loss in consumer surplus in the taxi industry because as per the research conducted by Deloitte for Uber in Australia as demand for Uber increases therefore, a decrease in consumer surplus, would dictate a decrease in competition. Therefore, for every Uber or Grab demanded, consumers lose surplus that they would have derived from using taxi services for instance, being able to street hail a taxi.
Ideally, increased competition increases efficiency as firms are encouraged to reduce costs thus produce goods and services more efficiently. This has been supported by research conducted by Tomas Sjöström in his 1995 paper where he concluded that competition is the main driving force for efficiency. Therefore, if the transportation market experiences an increase in efficiency, a possible factor is because of an increase in competition. However, this research was conducted 20 years ago therefore may still not be applicable. Uber has shown to increase efficiency in the transportation market in the US, for instance, in LA, Uber is close to 10-12% more efficient in comparison to taxi drivers and this is a similar trend in Seattle as well. Therefore, more efficiency can be a signal for greater competition however, this is only applicable to some states in the US. Furthermore, Uber is more productive in the US as they have a greater capacity utilization and are therefore using a greater percentage of their productive capacity. However, in Singapore, legally, taxi drivers have to have a passenger for 85% of the distance they travel therefore, a greater passenger rate may not be an adequate indicator for competition.
Furthermore, as per Laurent Weill, greater competition encourages firms to lower production costs and become more efficient and this can be seen from Comfort Delgro’s operating costs. Their costs before the entry of Uber/Grab in the 2013/2014 period was close to $3609.2 million however, in 2017, this was close to 879.9 million which is a significant decline therefore the market became more competitive however, this only take place in a longer period of time because Comfort experienced an increase in costs in the year 2015 of 50 million. Therefore, the market became more competitive over the long run. However, the research conducted by Weill was close to 15 years ago and was on the EU Banking Sector therefore this may not be applicable however, this research has also been supported by Sjöström’s research.
Grab on the other hand has been experiencing losses as in 2014, their expenditure is exceeding their revenue therefore, not profitable. Therefore, this means that inefficiency is permitted as it is experiencing a loss therefore the market has become less competitive. This is also reflected in Uber as it is also experiencing a loss. However, this data is from their first entry into the transportation market therefore may not be substantial of an indicator to say that the market has not become more competitive. Furthermore, offering cheaper prices is an indicator of declining costs of production therefore greater efficiency and greater competition.
As per the interview with the transport analysis, because of the increase in the rental car population, Singapore traffic will increase as the total vehicles on the road will increase. This is supported as there is a large spike in rental cars from the period of 2014 to 2016. An increase in the number of cars on the road is an instance of market failure as it is a negative externality of consumption. As per the USEPA, one car emits 4700 kg of CO2 annually, therefore, a 40,000 increase in rental cars, annual CO2 emissions should ideally increase by 1.9 x 108.
This results in market failure, any instance in which a free market fails to allocate its scarce resources efficiently leading to overallocation, underallocation or no allocation of resources to the production of goods and services most desired by society. The market outcome in Figure 8 is given by the intersection of MPC and MPB, leading to 55,000 (Qm) and Pm. The socially optimum level is the intersection of MSC and MSB leading to 15,000(Qopt) and Popt. Since Qopt < Qm, resources are overallocated to the provision of rental cars. The divergence between MPB and MSB is the external costs such as CO2 emissions of 1.9 x 108 kg, that are ignored. Therefore, the market for rental cars is allocatively efficient assuming that the market was allocatively efficient with 15,000 rental cars.
From research conducted by Tae Hoon Oum, increasing competition improves allocative efficiency however in this instance, allocative inefficiency has increased therefore, as per his research, competition must have decreased therefore, the market became less competitive as observed from the increase in negative externalities of consumption of the increase in the number of rental cars. However, his research was conducted in 1995 and was centered around the US telephone industry therefore may not be completely applicable. Furthermore, from Figure 9, the total number of cars on the road has actually decreased because the population of taxis has decreased more than the increase in the population of rental cars. Therefore, this may not be suitable in measuring the degree of competition.
The private transportation industry in Singapore has experienced a change through the introduction of ride-hailing services of Uber and Grab that have continued to be prevalent in this market for the past 3 to 4 years. This research does show that the market for private transportation in Singapore has become more competitive following the recent entry when analyzing the changing market structure, price competition, consumer surplus and efficiency. It was shown that there was a significant change to the market structure from more of a monopoly to an oligopoly which was one of the main reasons for the increase in competition. Furthermore, in terms of consumer surplus, although, some secondary research opposed this idea of increasing consumer surplus, overall consumer welfare did increase therefore did increase competition in this market. However, the initial perception of Uber and Grab being entirely beneficial was refuted as when analyzing efficiency showed that they operated at high losses and there was a further sharp increase in motorway accidents following their entry. This research has nevertheless successfully answered the research question in finding out whether the market has become more competitive following Uber and Grab’s recent entry.
There have been some limitations to this research as most of the secondary research that supported these arguments were based on Uber worldwide and not specifically in Singapore as Singaporean economists haven’t publicly disclosed information regarding research. Furthermore, most of the secondary research was concentrated around Uber and not particularly Grab as since Grab is mainly only prevalent in South Asia, it hasn’t reached world recognition as of yet hence the lack of research. Furthermore, this research has been conducted without taking into consideration the most popular option for transportation in Singapore which is the growing public transportation. The public transportation sector is much preferred over taxis and ride-hailing services so this research is in fact very limited to only the private transportation sector in Singapore which although is large, isn’t as significant. Consequently, a possible extension to this research would be to investigate and research the transportation industry as a whole and consider whether the transportation industry has become more competitive following the entry of Uber and Grab therefore, taking into consideration, public transportation as well. This would be a much better representation of competition and efficiency for the future implications on Singapore.