NATURE OF EQUILIBRIUM IN THE MARKET FOR TAXI SERVICES

Abstract

This paper reports an investigation of the mechanism by which demand and supply are quilibrated in the regulated taxi market. A simple model is developed in which the demand for taxi trips, as measured by the passenger arrival rate, is a function of a set of exogenous variables, including fares, and of the endogenous variable, taxi availability, is developed. The profitability of taxi operations is determined by exogenous factors and by an endogenous variable, taxi utilization. The number of taxi vehicles supplied is determined by the profit function and by the industrial structure. Taxi availability, which is measured by expected waiting time, and utilization, which is measured by the expected proportion of time the vehicle is occupied, are determined by both the passenger arrival rate and the number of taxi operating. The complexity of the taxi market, particularly its spatial and temporal aspects, makes considerable idealization necessary for its analysis. Even the simple model developed here does not admit a closed form solution for its equilibrium conditions, thereby constraining the work to a numerical example. The most striking feature of the model is its demonstration that in the taxi market supply generates demand and vice versa since an exogenously caused increase in the number of taxis operating will decrease waiting times and thus increase the passenger arrival rate, which will increase the taxi occupancy rate and thus increase profits and, hence, the taxi supply. This supply-demand interaction can be explosive but eventually must damp out. /Author/

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