From taxis to ride-hailing: market equilibrium analysis and implications for regulations

Abstract

In recent years, app-based, on-demand ride services - also known as ride-hailing have emerged and rapidly grown in popularity around the world. Advanced ride-hailing platforms enable all desired private car drivers to provide on-demand and door-to-door services, therefore bringing huge impacts on the traditional taxi industry and directly challenging existing regulations towards the taxi industry. How to regulate ride-hailing services in the new era become an immense concern for local governments. To answer this question, this chapter first reviews the necessity of price and entry regulation for the traditional taxi industry, and then introduces a well-established model to depict the taxi market equilibrium and reveal the impacts of taxi fare rate and taxi fleet size on the taxi service quality, driver profit, and social welfare. Based on the similarities and dissimilarities between taxi and ride-sourcing services, we then modify the model to capture the ride-sourcing market equilibrium with the prices of ride-sourcing services being determined by a platform. The impacts of the platform’s pricing strategies on the ride-sourcing market performance and social welfare are explicitly derived, and the necessity of regulation towards the platform’s pricing strategy is discussed.