Equilibrium properties of taxi markets with search frictions

The equilibrium properties of an aggregate taxi market are investigated using a general bilateral searching and meeting function which characterizes the search frictions between vacant taxis and unserved customers. Three specific issues are analyzed for meeting functions that exhibit increasing, constant and decreasing returns to scale. Firstly, service quality in terms of customer wait/search time and average profit per taxi are examined jointly in relation to taxi fleet size, and a Pareto-improving win–win situation is identified, where an increase in taxi fleet size leads to improvements in both service quality and market profitability. Such a Pareto-improving situation is found to emerge if and only if the meeting functions show increasing returns to scale. Secondly, the properties of the socially optimal solution are examined. It is found that the taxi fleet size should be chosen such that the total cost of operating vacant taxis equals the total cost of customer waiting time multiplied by an asymmetric factor of the meeting function, and that taxi services should be subsidized at social optimum only when the meeting functions show increasing returns to scale. Thirdly, the Pareto-efficient services are examined for trade-offs between social welfare and profits in the light of partially conflicting objectives of the public sector and the private taxi firms using a bi-objective maximization approach. The taxi utilization rate and the customer wait/search time or service quality are proved to be constant along the Pareto frontier and equal to those at social optimum if the meeting functions show constant returns to scale. Extensions are made to the cases with increasing and decreasing returns to scale.

Research highlights
► Introduced a meeting function to characterize the search frictions in an aggregate taxi market.
► Investigated the occurrence of Pareto-improving taxi services.
► Investigated market profitability at social optimum.
► Examined the properties of taxi utilization and service quality under Pareto-efficient services.