Economics of Taxi Medalions (Re: taxi! taxi!

Wojtek Sokolowski sokol at jhu.edu
Mon May 18 10:02:09 PDT 1998


At 08:53 AM 5/18/98 -0700, Jim Devine wrote, responding to my argument that transaction cost would keep the taxi fares high:
>It's true that the "asymmetric info" problem rears its ugly head here. But
>it seems pretty obvious that the cabbies would have an incentive to paint
>the price they're charging on the outside of the cab ("Cheap Cab! Only 25
>cents per half-parsec" or whatever). This might make the cabs more ugly
>(and encourage other ugliness in the form of billboards and advertising
>bus-benches), but it would encourage price competition.

But that will only partially alleviate the problem. Sure, I may not want to hail a taxi that does not display the price I like, in the same vein as I will not buy gasoline from a station that displays prices higher than the one few blocks away.

Howevwer, as everyone has a chance to observe, gas stations near major interchanges or freeway/turnpike exits have usually higher prices than those farther away. In the same vein, junk food sold at service stations along, say, New Jersey Turnpike is nearly twice as expensive as the same junk food sold elsewhere.

The reason for that pricing is quite simple. The owners of the said establishments know darn well that I know that their prices are scandalously high. Yet they bet on that I will buy from them, because the cost of investigating what my best alternative in this particular area is can be quite high, especially if I am in a hurry and unfamilair with the area (which applies to most travelers).

For the same reason, cabbies in most major cities are almost certain to give you a much higher rate if you hail them at the airport or a railroad station - it is a well known fact. Moreover, they know darn well that you know they are ripping you off - but they bank on that you will be unwilling to take the risk of looking for cheaper alternatives.

So if the invisible hand has failed to bring the prices of everything else to the lowest common denominator (another example: convenience store vs. supermarket prices), there is no reason to believe it will do the same with taxicab fares.

Regards,

Wojtek



More information about the lbo-talk mailing list