Taxi Industry

Oligopoly

FeaturesThere are 7 taxi operators in Singapore and the most common ones are Comfort Taxi, CityCab, SMRT Taxis, TransCab and Premier. In Singapore, ComfortDelGro (operating comfort taxi and CityCab), has 62% of the market share and market leader in the taxi industry.

In addition, there are only imperfect substitutes for taxi services, such as public transport, because taxis provide faster, more convenient and more comfortable services.

Oligopoly can decide what price to sell its services at because they have control over the surcharges during peak hours, advance booking and midnight hours. Also, they charge higher prices at different pick-up locations – CBD, etc has higher flagdown fare than other areas.

The high capital outlay, to own cars, necessary to provide taxi services and time to compete with first mover are potential barriers to entry for potential sellers. Furthermore, state-created barriers to entry such as the Taxi Driver Vocational license caps the number of taxi drivers available for taxi companies and Business Licensing restricts the number of new entrants joining the industry.

Behaviour

BASIC TAXI FARESFlag-down fare S$3 to S$3.90

Distance fares22 cents every 400 metres (above 1km-10km)*22 cents every 350 metres (above 10km)*

Waiting time 22 cents every 45 seconds*

* Except for SMRT Chrysler, Comfort/CityCab Mercedes Benz, Trans-Cab Mercedes Benz, Premier Mercedes Benz and other premium taxis.

Price discriminationNecessary conditions are fulfilled

They are price setters because they set their prices at $3-$3.90 for 1st 1km with an additional increase of $0.22 for 400m.The markets are separated based on

They are the price setters, as seen from the surcharge of an additional 25% of the standard meter during peak hours and additional 50% late night charges.The markets for normal hours and peak hours are separated and no resale is possible.The price elasticity of demand during the normal hours is less price elastic than

distanceThe price elasticity of demand for 1st 1 km is more price inelastic than more than 1 km distance. This is because consumers would usually need to travel at least 1 km or they would prefer to walk.

during peak hours. This is because majority of the consumers are going for work or are off work during peak hours, they want to get to their destination as fast as possible.

Type 2nd degree 3rd degreeReason

With price discrimination, the seller would charge different blocs of output at different pricesOriginally, seller could only earn P2BQ20Now, seller could earn 0P1AQ1+Q1CBQ2, where total revenue increases by P2P1AC.Ceteris paribus, total profits would increase.

Producers, being profit orientated, will produce at profit maximizing level- MC= combined MR as seen in (iii) at point X by the equating of MR1 and MR2 from both hours. The taxi firm supplies at 0Q3 by the sum of 0Q1 and 0Q2, so that MR1 and MR2 is equated to the same MC. Since demand in normal hours is more price elastic (less steep), he charges a lower price in normal hours compared to peak hours.

Performance

Efficiency(i) Allocative inefficiencyComfortDelGro produces its output up to the level where P>MC. Since consumers value the last unit of the good more than it costs to produce, the good is under produced and increasing the output can increase the welfare of consumers. The under production of the good has led to the loss in society’s welfare seen in Fig. 1.1 below. Also, a perfectly competitive market would have produced the socially efficient output level of QPC, however, ComfortDelGro produces at QM level of output. The fall in welfare (deadweight loss) to society seen in Fig 1.1 below. In addition, ComfortDelGro seeking to maximise profits is producing on the falling portion of the LRAC and hence does not achieve productive efficiency.

Fig. 1.1: Market for Taxis in Singapore

(ii) InequityComfortDelGro earns supernormal profits even in the long run due to strong barriers to entry. These profits go to shareholders who may be mainly upper income earners. This may worsen the income distribution in Singapore as the rich gets richer and the poor gets poorer.

(iii) Less X-inefficiencyComfortDelGro will be less X-inefficient because, annually, TransCab and SMRT have to build fleet size and capturing network area more than ComfortDelGro to balance the number of fleet size in operators. Hence, they will undertake measures to ensure that there is no lax in cost control to keep their AC and MC curves as low as possible.

(iv) Dynamic efficiencyComfortDelGro undertakes R&D, such as having a hotline connecting to all taxi operators in Singapore, touch-screen pick-up locations of customers to ensure a more efficient and smoother ride for their customers. This incentive comes about from its desire to maintain its market leader status, which might be challenged by other taxi companies.

Problems related to imperfect information and asymmetric information is frequently observed in the taxi industry.

PerformanceBeing an oligopoly, the taxi industry is economically inefficient, with productive inefficiency and allocative inefficiency. This is because monopolies do not produce at the minimum average cost, thus productive inefficiency in society’s point of view, does not produce at P=MC but at P>MC, thus allocative inefficiency. There is dynamic efficiency as oligopoly have supernormal profits, thus they have extra funding to be used for research and to spend on expanding their industry, as seen in Comfort.