Thursday, July 22, 2010

The economics of taxi/auto markets

Slightly dated post - but goes to show that this is an interesting topic.

The next big question that is intriguing is that of pre-paid autos. Are they efficient - both from the demand and supply point of view? If that be so, then why not create multiple such hubs around the city? I suspect that they may not be an efficient as it sounds. Food for thought ...

Thursday, July 15, 2010

Trashing behavioural Economics?

Friday, July 9, 2010

Breaking the auto cartels?!

Another update on the market for autorickshaws. The other day, we had to take an auto – and we walked up to the ‘auto-stand ‘ (essentially, an informal gathering of auto-rickshaws, ostensibly to provide a way for people to reduce the costs of seeking out an auto – which makes sense, on the face of it). When we asked for a ride, there was a quick, impromptu huddle among the auto drivers and they came back with an atrociously high quote and needless to say, refused to go by the fare meter. Clearly, cartelization was at work here. Note that this is independent of a competitive equilibrium for the demand-supply of autos that may exist at the city level (which I had mentioned earlier). This is what may be called a positional monopoly which would come into play where active collusion drives up the prices.
Under classical micro-economic theory, as the number of suppliers of a good or service increases, there comes a point where it is no longer possible to form cartels as the cost of cartelization becomes prohibitively high. As with most things about classical micro-economics, rarely ever happens in real life.
Which then brings us to a policy question – is there any way to solve this problem or are we as consumers of this service, doomed to suffer? One way to enable this would be to disallow ‘auto-stands’, which would make it difficult to create the situation for cartels to form in the first place. Taking this one step further, it would be even better to force the auto/taxi drivers to keep driving around (rather than waiting at a place). In addition to preventing them from forming pools of cartels, it would also create a very strong incentive for the drivers to pick up fares as and when they are available – following the simple logic that it is better to drive around on a fare rather than incurring the marginal costs of driving around without any revenues. Clearly a desirable solution as far as the consumers are concerned – and to make it equitable, the drivers have to be compensated, the only way for that to happen is to allow a higher fare/unit distance, which will also create a further incentive not to drive around empty, while compensating for the incremental marginal cost that they have to incur for not being allowed to wait at a place.
Meanwhile, now you have the answer why the taxi and auto drivers prefer to create these ‘stands’ , which by the way, tend to be more common in places where general enforcement is poor (hence you would see a higher number of stands in places where the metering systems do not exist. In Delhi for instance, the ‘taxi stand’ is an integral part of most neighbourhoods).
And finally, what did we do that day to get a better deal? Just walked down a short-distance around the block and waited (out of sight of our predatory monopolists) – a short wait later, one auto-driver came by and offered to take us on the meter fare.