Dec 7, 2018

What Scooter Regulations Mean for Riders and Companies

Jennifer Huddleston Research Fellow , Yuliya Yatsyshina Staff writer

Cities have responded in various ways to the arrival of dockless electric scooters. The regulatory reactions have ranged from a wait-and-see approach or active collaboration with scooter innovators to hefty fines and flat-out bans on the devices. Following in the footsteps of earlier sharing economy entrepreneurs like Lyft and Uber, scooter innovators have mainly acted first and asked for permission (or forgiveness) second.

At times the economic impact of regulation on this growing transportation innovation is quite apparent. For example, permit costs, daily surcharges, and relocation fees imposed by cities like Portland, Oregon and San Antonio, Texas will decrease the profitability of each scooter and could directly raise the cost per ride. But regulations such as caps and distribution requirements also affect innovation and market entry in ways that may impact both industry costs and rider prices.

Direct Cost to Consumers

So far, scooter companies appear to have absorbed the cost of city regulations and have not passed them along to the consumer. Pricing has remained consistent across cities, even though some cities place more costly burdens on these innovators than others. Since most of these regulatory efforts have been reactive in nature, this may simply be because prices had already been established and there is a strong desire to maintain consistent pricing across the country to encourage adoption and easy deployment.

Maintaining low prices has been key to the success of these scooters, and despite claims to the contrary, this low-cost transportation option has been most favorably received by those making less than $50,000 a year. If scooters continue to face increasing regulatory costs, they will eventually be forced to raise their prices—which will harm consumers seeking low-cost transportation options.

For example, in addition to requiring non-refundable permit fees of $5,250 during the four-month pilot program, Portland, Oregon officials introduced a surcharge of $0.25 per ride. The maximum number of shared scooters allowed at the time of the pilot program deployment is 200. That means that a company would incur $1.25 for every five rides, in addition to a fixed cost of up to $26.25 per scooter during these four months. If these costs were passed along to the consumer, the cost of an average scooter ride would increase by almost 20 percent from its current $1.91 (based on average trip length and time) to approximately $2.25, assuming the current average of five rides per day continued. This does not include any additional increases in operating cost due to other requirements or restrictions, such as caps or area-specific deployments or features or a decrease in ridership that might occur from an increase in pricing.

Caps on the total number of scooters prevent companies from diluting the fixed costs of permits, so even if individual scooters are used more, costs would still increase. As trips per day increase for each individual scooter, so would the maintenance and charging costs. As a result, the cost and price of each scooter ride might actually rise.

When it comes to permit fees and per ride surcharges, the costs are quite apparent, but other regulations can also raise prices on consumers.

Effects on Competition

In some cases, scooter regulations place less of a burden on the early evasive players and serve more as a deterrent to new players looking to deploy dockless scooters or other micro-mobility transportation options. Early movers may either be grandfathered into more friendly regulatory environments or better able to meet requirements such as equitable deployment around the cities based on their existing fleet.

Caps on the number of scooters per company can limit the number of new players entering the market if they are set too low or have minimum deployment requirements. Total caps on the number of scooters can be even more harmful if they clearly benefit larger players and those who enter the market early.

Deploying caps after scooters have already arrived could be particularly damaging for competition and innovation in the industry. In some cases, these caps have been set lower than the number of scooters currently deployed, forcing companies to withdraw scooters regardless of consumer demand. These caps are rarely accompanied by an articulated rationale of how they were calculated, but rather appear to be an arbitrary number set by regulators at their discretion. If these caps remain static, they may encourage newer entrepreneurs to seek less regulated markets rather than having to worry about artificial limitations on potential growth or not being able to adequately deploy in the first place. Meanwhile, existing players have little incentive to provide broader service or expand into additional areas of the city. This is not a new tactic from regulators. Similar caps were used in the taxi market, resulting in higher prices for consumers and preventing new innovators like Uber and Lyft from entering the market.

Regulations can also limit competition by effectively requiring city specific products. For example, DC’s new scooter guidelines cap the speed of the devices at 10 mph rather than the standard 15 mph they currently travel in other markets such as California. Some jurisdictions also require companies to accept additional payment options and create low-income pricing plans. As a result, an innovator would be forced to choose between creating a DC-specific product, undertaking significant costs to change the existing product, or completely leaving the market in that area. Pursuing any of these options would decrease the number of competitors in the micro-mobility market in DC.

With fewer competitors in the market, it is likely consumers will see fewer options, less innovation, and higher prices negating what many enjoy about micromobility options like scooters in the first place.

What Happens Next?

In some ways, ensuing interactions between scooter entrepreneurs and regulators can be predicted from historical behaviors of other firms that, after initially thriving due to a lack of regulation, may end up later seeking regulation. To quote The Dark Knight, “You either die the hero or live long enough to see yourself become the villain.”

In 1971, George Stigler emphasized that regulation is often “acquired by the industry and is designed and operated primarily for its benefit.” Moreover, according to Stigler, when supply is more elastic, which is the case for urban scooter vendors, larger providers are likely to be more interested in influencing regulation. Later, Fred McChesney advanced the theory by introducing the role of the politician in extracting returns from the proposed regulation (1987). The variety of responses among cities to the scooter “invasion” supports the observations of these economists.

Therefore, when the scooter companies negotiate operations in any given city, it is in their interest to preemptively negotiate regulations to properly address the company’s business model without imposing additional costs. Furthermore, in considering regulation proposals, companies should anticipate the costs associated with political resistance or logrolling.

So far scooter companies and other micromobility entrepreneurs seem committed to outpacing and opposing regulation. Unlike other sharing economy innovations, there does not seem to be a direct analog industry that is being displaced or has an existing special interest. As a result, some scooter companies may work cooperatively with policymakers to develop innovation-friendly frameworks for regulation.

In the past year, cities have experimented with a variety of different regulatory frameworks when faced with the rapid deployment of technology. The cities that have taken the most hands-off approach will likely see the greatest benefits in the form of a diverse transportation ecosystem, while those that have taken a more stringent approach will see fewer options and rising costs. As with any new technology, it remains to be seen how much of these costs will be passed on to consumers. But for cities struggling to increase transportation options and decrease road congestion, it would be wise to consider the impact that these regulations might have on entrepreneurship and innovation.

Photo credit: Fiona Goodall/Getty Images 

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