Deregulating Taxi Services: A Word of Caution

This paper studies pricing and capacity decisions in markets for phone-ordered taxicabs. Taxi firms first choose capacities and then compete in prices. As firm demand increases, so does waiting time. This dampens competition and makes prices too high from the social point of view. Efficiency improves if firms choose large capacities. In a two-firm setting, equilibrium capacities are shown to be larger if both firms maximise total profits than if they maximise profits per cab. Hence, if fixed costs for entrant cabs are small, the market is more efficient in the former case.