Photo by M.V. Jantzen on Flickr.

Recent news that Zipcar is losing some of its coveted on-street spaces in DC has sparked discussion about how new competition might impact the region’s car-sharing network. Economic theory suggests that the impact on prices and service might not be as large as some hope.

Zipcar currently enjoys monopoly status in DC. Since acquiring Flexcar in 2007, Zipcar has been the only car sharing game in town. Consumers tend to think poorly of businesses that operate as monopolies, even if such firms can take advantage of efficiencies and pass the benefits down to customers. The prospect of three new competitors is welcome news to those who believe competition will benefit all concerned.

The car sharing market will soon morph into an oligopoly: an industry dominated by a handful of businesses and has high barriers to entry. In the case of car sharing, the high capital costs of vehicles and technological infrastructure make it very difficult for all but a few firms to enter the market.

Oligopolies share an important characteristic with monopolies: firms price goods and services not based simply on supply and demand, but in the way that maximizes their revenue, while taking into consideration how their competitors behave. Oligopoly industries are notorious difficult to understand, and game theory scholars have stepped into help explain why these firms behave the way they do.

In a perfectly competitive market, competition among firms brings down prices. In an oligopoly, this is also true to an extent.  Consider the case of a well-known oligopoly: airlines. The air travel industry is dominated by a small number of firms and barriers to entry are extremely high. Even so, “fare wars” occasionally drive prices down and yield great deals for consumers.

Car sharing is unlike air travel in one key way: customers are screened for safe driving records, and must be a member of a given company to use its cars. In the case of Zipcar, a potential customer must submit an application that shows that they have a driver’s license and have committed no serious infractions behind the wheel. If a potential customer lacks either of these, he or she is ineligible for the service.

Imagine if airlines operated similarly: Before booking a trip, you would have to buy a membership with the airline. You’d only be able to buy fares from those companies where you held a membership. Airlines would still compete for business on price, but in different ways. “Fare wars” would be a much less likely occurance.

In that sense, the market for car-sharing is more like the cell phone industry. Consumers are allowed to sign up with as many wireless carriers as they please; but most pick just one and stick with it. Rates are a major selling point, as are features like service coverage and available phones.

Even with monopoly status in many cities, and the perception of success, Zipcar is not a profitable company. In it’s ten-year history, the firm has never turned a profit. Until recently, the District indirectly subsidized the company by offering choice parking spaces at below-market rates.

Arguably, Zipcar was able to pass those savings on to their customers. And with monopoly status, it became a one-stop shop for anyone looking to have access to a shared car. If, instead, the region’s 800-some shared cars had been split among four companies, a customer holding a membership with only one service would have access to only a fraction of the total number of cars.

Still, competition will likely mean more total shared cars in the region, which is good from an urbanist perspective. It should benefit the consumer by forcing the industry, including Zipcar, to offer attractive rates and quality service. Just don’t expect it to drive down rates significantly or drastically alter the market in the immediate future.