Modeling Taxi Services with a Bilateral Taxi-Customer Searching and Meeting Function

Abstract

This paper investigates the properties of an aggregate taxi service model with general bilateral searching and meeting function, which characterize the meeting frictions between vacant taxis and customers. Two specific issues are analysed theoretically for meeting functions that exhibit increasing, constant and decreasing returns to scale, respectively. First, the market profitability at social optimum is examined, and it is found that taxi services should be subsidized at social optimum only when there are increasing returns to scale in the meeting function. Second, both service quality in terms of customer waiting/search time and average profit per taxi are examined in relation with taxi fleet size, and a Pareto-improving win-win situation is identified, where an increase in taxi fleet size leads to improvement in both service quality and market profitability. It is found such a Pareto-improving situation emerges if and only if there are increasing returns to scale in the meeting functions.