The Economics of Taxi Industry Regulation
A Kopp, World Bank, INT
The paper provides the economic rational for regulating the taxi industry. It analyses the different aspects of market failure determining the need for regulation.
As part of a general movement to deregulate the transport sector, the taxi industry has been deregulated in many countries. The success of these policies has been mixed. In some countries regulatory measures are being re-introduced.. The positive expectations with respect to deregulation of the taxi industry were based on the belief that the industry is an atomistic industry with minor fixed costs which should therefore develop into a perfectly competitive industry, providing taxi services at minimum costs. Given the experience with the deregulation of the taxi industry these expectations seem to have been naive.
The paper presents an analysis of the multiple, mutually interacting imperfections of an unregulated taxi industry in a unified analytical framework:
- Perfect competition requires that consumers can choose between different producers of goods and services at low costs. Depending on the organisation of the taxi market (cruising market or dispatch system), market participants will face smaller or higher search costs. Most importantly in a cruising market to turn down an offer has substantial search cost consequences for the consumer. It will be shown that and how the numbers of consumers and taxi service providers distribute the surplus between the producer and the buyer. In any case, even in an atomistic market suppliers enjoy local monopoly power.
- As repeat producer-customer relationships are rare, taxi service consumers face uncertainty about the taxi quality. As the customers cannot ex ante check for example the safety of the vehicle or the driving abilities of the driver only ex post. In the absence of regulation and given the transaction costs in the market, the competitive pressures in the taxi industry will induce low quality services as a result of providers exploiting the ex ante imperfect information of the customers.
- Deregulation of entry will increase the average costs of the service as more idle capacity in the form of cruising empty taxis or taxis waiting at the taxi stand will be available.
- At the same time there are economies of density: Double the number of all lengths of taxi trips and simultaneously double the number of taxis. Doing this would double the density of vacant taxis and so decrease the average waiting time. That is, deregulation leading to more entry reduces the waiting time while at the same time increases average producer costs by increasing the idle capacity.
The paper will provide a simultaneous analysis of these aspects of regulating the taxi industry in a search theoretic framework. It will take account of the fact that increasing the number of market participants will not necessarily lead to expected price reductions and quality improvements due to the protection of producers from competitive pressures by transaction costs in the form of search costs. At the same time increased market participation will lead to additional excess capacity with an upward pressure on prices. The higher prices will be partly offset by consumer benefits from reduced waiting times. The paper will provide an analytical solution for the regulation of these conflicting imperfections of the taxi industry.
Association for European Transport