The Obike Mess: A Market Failure Lesson

In March earlier this year, there came news that Uber was merging its operations in South-East Asia with Grab’s. Passengers and drivers were adversely affected because Grab became the only service provider in the Private Hire market at that time. 

As predicted by standard Economics theory on how monopolies would behave,  passengers began having to pay more for their rides and drivers began to take home less income, as Grab started drawing down its incentive program.

Only 3 months later, consumers in Singapore woke up to yet another rude shock when oBike shuttered its operations here without prior warning.

In both cases, Uber’s withdrawal and oBike’s liquidation in Singapore had disruptive impacts to the Singapore society. But in some ways, the impact felt by oBike’s liquidation was more severe:

  1. There was “physical mess” to clean up in the form of up to 14,000 abandoned bikes.
  2. Consumers suffered monetary loss with non-refunds for their deposits.

Unsurprisingly, given the short time-span between Uber’s withdrawal and oBike’s demise, and the adverse impacts to society, there have been commentaries on whether the regulators have been “too slow” in managing the changing landscape.

We are not inclined to disagree. In fact, we believe that the Singapore government could have taken a more active approach in the bike-sharing industry to avoid such fall-outs.

This is because the bike-sharing industry exhibits multiple sources of market failures, which has to be addressed by the government.

External Cost of Consumption

We are all too familiar with a major problem with the dock-less bike-sharing systems – indiscriminate parking of bikes and even dumping.

The inconvenience posed to society by this inconsiderate behaviour is conveniently (pun unintended) illustrated in Economics as a case of External Cost of Consumption.

As seen in the graph above, the Marginal Private Benefit (MPB) experienced by the individual is higher than that experienced by society as a whole (Marginal Social Benefit – MSB), because the convenience of indiscriminate parking poses additional cost to society.

The end-result is over-consumption (the market consumes at Qe instead of the socially optimal point at Qs), and a resultant dead-weight loss of the area ABC.

A “no-brainer” classic Economics solution to this problem is taxation, with the aim of reducing the over-consumption to the societal optimum point of Qs.

External Benefit of Consumption

We have heard about how bad traffic jams can get in the neighbouring cities of Jakarta, Bangkok, Manila, Kuala Lumpur – to name a few.

To reduce the likelihood of Singapore developing similar issues, the government’s strategy has been to both discourage car purchase, and encourage the taking up of public transport.

Bike-sharing is seen as a key solution to the “Last-Mile” problem, where transportation becomes less efficient at the last leg of the journey.

Many of us experience this very often – be it connecting from our homes to the MRT or bus station, or having to walk considerable distances to eat at our favourite eateries “near-by”.

Bike-sharing helps tremendously in bridging the last-mile gap because it can provide door-step transportation, complimenting existing train and bus services, making the public transport solution more attractive on the whole.

As a bonus, cycling is emission-free too and therefore fits nicely as well into our desire to reduce air pollution.

All of these meant that the bike-sharing solution exhibits External Benefits of Consumption, which can be illustrated with the following graph:

In this case, the MSB experienced by society is higher than that experienced by the individual (MPB), because of the benefits experienced by society as a whole when bike-sharing is utilised by the individual.

The end-result is under-consumption (the market consumes at Qe instead of the socially optimal point at Qs), and a resultant dead-weight loss of the area ABC.

A “no-brainer” classic Economics solution to this problem is subsidisation, with the aim of increasing consumption to the societal optimum point of Qs.

Public Good 

Any form of transportation, including bike-sharing, requires infrastructure development. Bike-sharing minimally requires paved roads and pavements for the solution to be effective.

It is doubtful that you would enjoy riding a bicycle across unpaved roads on a daily basis.

In most cases, such as in Singapore, the roads and pavements are essentially public goods, because:

  1. They are non-excludable – people do not need to pay to use these facilities.
  2. They are non-rivalrous – unless congestion becomes an issue, utilising these facilities does not diminish the ability of others to do the same.

Because of free-ridership problems, there is a need for government provision of these facilities, be it by engaging the private sector or through direct provision.

Asymmetric Information

oBike’s sudden demise took everyone by surprise because its plans were opaque to all of us, as with most cases with firms in the free market.

This is a classic case of Asymmetric Information and it causes market inefficiencies through mis-allocation of resources based on incomplete or wrong information.

Because few consumers knew about oBike’s financial woes, many had gone ahead to place a deposit with oBike to use the bicycles.

Similarly, because there was no known exit plan submitted to the regulator (LTA), when oBike folded suddenly, it was left to the state (and society) to dispose of the abandoned bicycles left behind.

All of these consequences exact costs on society. Asymmetric Information caused society to over-value and over-consume on bike-sharing, which was made worse by the fact that LTA was still inexperienced in handling bike-sharing companies.

A Strong Case for Government Provision?

A good way to visualise the appropriate policy by the government is by using a decision-quadrant.

In the above diagram, the top right quadrant represents a type of good or service that exhibits high positive and negative externalities. The bottom left quadrant represents that of low positive and negative externalities.

Generally speaking, goods or services that exhibit high levels of positive Externalities will require strong government intervention for the best outcome. This is because if left to market forces, there is a tendency for under-production which is sub-optimal for society.

Usually for cases of high negative externalities,  the free market will over-produce, requiring the government to limit the production to socially desirable levels.

Matters are least straightforward when it comes to goods that exhibit high levels of both positive and negative externalities. If we apply the Economics concepts blindly, should that mean both taxing and subsidising like we discussed earlier, at the same time?

We argue that government provision for such goods and services allows the government, whose goal is to maximise social welfare, to:

  1. Take the key issue of negative externalities into consideration in designing the good or service.
  2. Produce more than what the free market would have.
  3. Internalise information on the bike-sharing service, that would otherwise have been opaque to society in the free market, reducing the likelihood of surprises.

In May 2017, LTA missed this boat by failing to award a contract for the provision of bike-sharing. 

Today we observe the authorities playing catch-up to problems caused by dockless bike-sharing providers and having to tighten regulations, which has in turn caused further instabilities as more entrants are forced to shut down. This too, didn’t help the cause for using bike-sharing as a strategy to encourage the use of public transport. 

We are inclined to argue that this situation could have been avoided with a more “hands-on” government intervention. Do you agree with our assessment? Let us know your thoughts below!

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To find out more about my services as a JC Economics tutor, visit my website here.

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