Essay: Singapore’s existing private transportation

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With high prices for car ownership in Singapore, with annual costs aside from the purchase of a car resulting in near SG$20,000, the private and public transportation network in Singapore is an important method of transportation.

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.

Methodology:

Primary Sources:

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.

Secondary Sources:

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.

Findings:

Primary Research:

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.

Secondary Research:

Market Structure:

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).

Price Competition:

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.

Consumer Surplus:

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.

Efficiency:

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.

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