Dec 17, 2020
When I was a kid growing up on our family farm my parents often told me to do something “because it was good for me.” At the time, I often did not think it was, but now that I am older I realize they were usually right. Occasionally, the same can be said for the government telling firms what to do.
I noticed recently that the price of renting a bicycle through China’s bike sharing companies has gone up over the last few years. This got me thinking about why that might be. One answer is that there has been a shakeout in the industry during this time so that there are now two major firms, Ofo and Mobike, instead of dozens. As I’ve discussed before, fewer firms usually leads to higher prices. But this begs the question of how we got to two firms in just a few years. I think part of the reason is government telling the firms what to do.
In early 2017, there were over seventy bike-sharing companies and bikes could be rented as cheaply as one RMB per month. For those of us living in Beijing and other major cities it also meant sidewalks cluttered with bikes that were haphazardly parked making it difficult to walk anywhere.
In mid-2017, the Ministry of Transportation moved to clean up the mess of randomly-parked bikes and other problems in the industry. The Ministry issued a framework for cities to follow. City governments followed up rapidly with specific regulations. By January 2018, thirty cities had some form of regulation. The regulations varied across cities but only a little because they were guided by the Ministry’s framework. Parts of the regulation were costly for the firms. They were required to clean up all illegally-parked bikes and have a minimum number of operations and maintenance staff based on the number of bikes they offered in the market.
However, there was one provision that I think was good for the firms (at least some of them). To prevent the streets from being further cluttered with bikes, the regulations prevented the firms from adding more bikes to their networks. The regulations capped the number of bikes at the number in place at the time the regulations were issued. Actually, they were even more restrictive. A broken bike could be repaired and placed back in service but once it was beyond repair it could not be replaced. So the number of bikes would actually decline over time. For example, in September 2017 when Beijing’s regulations went into effect 2.35 million bikes were on the street. One year later, this had dropped to 1.91 million. This sounds bad for the firms but I do not think so.
Why might this be good for firms? Firms do not want to produce too much output because this lowers prices. If the firm is lucky enough to be a monopolist this is easy. But for a firm facing competitors this is hard. Each competitor would like to constrain the industry’s overall output to keep prices high; however, they would prefer that other firms reduce their output and let them continue selling the same amount at the higher price. If, on the other hand, the firm reduces its output all its competitors can benefit from the higher price and continue selling the same amount. Since all the firms feel this way the industry is likely to end up with more output and lower prices.
This is where the government comes in. The bike-sharing regulations accomplish what the firms would like to do on their own but are unlikely to achieve. By freezing (and even reducing over time) the number of bikes, the government helps reduce industry output. Effectively, the firms stop competing on the number of bikes.
Although the bike-quantity restrictions probably helped the industry overall, it did not help all firms equally. Bike-sharing enjoys density economies: the service is worth more if bikes are spaced closely together across a city. This makes it easier to find a bike quickly and conveniently when you want one. Therefore, freezing the number of bikes benefitted bigger firms at the expense of smaller ones. The regulations effectively prevented the smaller firms from ever catching up to the larger firms in offering the same network density. This led to consolidation.
The industry had already begun consolidating prior to the regulations but they likely accelerated the trend. Under the regulations the only way a firm could increase its network density was to purchase another firm and integrate its bike network. In fact, there were 26 firms in September 2017 when most of these regulations went into effect. By April 2018 this had dropped to 17 and by that time Ofo and Mobike together had 90% of the market.
Did this actually increase prices though? We cannot say for sure but there is some anecdotal evidence that it did. In April 2018, as the market was rapidly consolidating, the firms ended a long price war and began removing subsidies and free rides. By October 2019, Mobike charged RMB 1.5 for each 30-minute increment in Beijing. Similar price hikes had occurred in Shanghai and Shenzhen. This is a tremendous increase from the RMB 1 per month in 2017.
Strategy scholars have long articulated that tying your own hands can be helpful (an idea I discussed in the context of movie releases) but sometimes it can be just as helpful if the government does the tying.
1 Jie Yang, “Bike Sharing in China –– From Bicycle Graveyards to a Regulated Industry,” Georgetown Environmental Law Review, April 29, 2020.
2 Jiaoe Wang, Jie Huang, and Michael Dunford, “Rethinking the Utility of Public Bicycles: The Development and Challenges of Station-Less Bike Sharing in China,” Sustainability, page 8.