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The industry for taxi services in most cities exhibits the following characteristics:
- The city has a limited number of taxi “medallions;” if you do not own a medallion from the city, you cannot operate your vehicle as a taxi service (i.e., you could not charge someone to drive them somewhere). You can buy a medallion from the city at an auction.
- The medallion allows you to operate a taxi, not simply to just drive one. Medallion owners often lease their medallions to drivers in shifts and charge the drivers a leasing fee.
- Taxi fares are usually set by a local city regulatory agency that oversees the industry.
- Taxi companies hire drivers (whose skills are generally easily transferrable to other firms, occupations, or industries), and also have expenses that are specific to the taxi industry (gasoline for the cabs, insurance requirements that differ from private vehicle insurance, driver training costs).
How much market power would an individual taxi driver have in setting the medallion purchase price?
a. Significant power; since only taxi drivers use the medallions, an individual taxi driver can offer and secure an artificially low price to purchase a medallion.
b. Moderate or mild power; an individual taxi driver has to compete against other drivers in securing a medallion at auction, but they can often work together to keep prices from rising too high.
c. Little to no power; there are lots of taxi companies and drivers in a given city, and the city is the sole supplier of medallions, so the power of an individual driver to influence the medallion price is very small.
How much market power would an individual taxi driver have in setting the driver lease fee?
a. Significant power; there are few people able to drive taxis in a given city or for a given taxi company, so individual drivers have a lot of power in negotiating the lease fee with the company.
b. Little to no power; there are not many taxi companies in a given city and many potential drivers, so the power of an individual driver over the lease fee is low.
c. Moderate or mild power; there are a lot of people able to drive a taxi, and they usually work together with other potential drivers against the taxi company to insure that the lease fee is acceptably low.
How much market power would an individual taxi driver have in setting the taxi fare?
a. Little to no power; drivers must comply with city fare regulations.
b. Significant power; taxi fare regulations are usually not followed, and so individual drivers can set whatever fares they want.
c. Moderate or mild power; drivers have to follow regulations but can usually set a few dollars above the required fare.
How much market power would an individual taxi driver have in setting the wages of transferable drivers?
a. Significant power; an individual driver would have a lot of power in setting his or her own wage.
b. Little to no power. There are a lot of potential taxi drivers and a few taxi companies, so an individual taxi driver has low power in setting his or her own wage.
c. Moderate or mild power; since drivers can transfer their abilities to other companies, an individual driver has quite a bit of power.
How much market power would an individual taxi driver have in setting the price of nontransferable expenses (gas, insurance, training)?
a. Significant power. An individual taxi driver can negotiate favorable prices on gas, insurance costs, and training fees.
b. Moderate or mild power. An individual driver must abide by company policy, but the company can often negotiate very favorable terms with gasoline companies, insurance companies, etc.
c. Little to no power. An individual taxi drivers have little ability to control these nontransferable prices.
Compare the market power of taxi companies today versus twenty years ago in terms of their ability to earn revenue/profit from customers:
a. Taxi companies today have about equal power to what they had twenty years ago. The "consumption" of taxi services hasn't changed over this time period; customers still travel on the same roads. Since they are buying a very similar product now vs. then, their power hasn't significantly changed.
b. Taxi companies today have much less market power over revenues because of the wider array of consumer substitutes available (Uber, Lyft, etc.).
c. Taxi companies today have much more market power than they did twenty years ago. With medallion prices in the hundreds of thousands of dollars, an individual taxi company can charge much higher fares now than they could in the past.