Cabbies in Singapore by Wai Chew (05)

I would like to analyze the market for taxies in Singapore using elasticity concepts.
Firstly, price elasticity of demand for taxies in general. Since taxi services are usually consumed by middle-upper income group, they tend to be price inelastic, where a change in price will bring about a less than proportionate change in quantity demanded. i.e. |Ep| < 1.

This is especially so during peak periods (e.g. 7 am to 9.30 am and 5 pm to 8pm on weekdays), rainy days, midnights, festive seasons and for some locations like Changi airport, Singapore Expo etc, where demand for taxi services is obviously price inelastic as people are desperate or really in need of the services to the extent that they do not really mind paying extra for the services.
This can be illustrated by the diagram (Figure 1)




From Figure 1, assuming price increase is for the peak hour’s period etc, it is observed that the demand is price inelastic for taxi services (indicated by the steep gradient of DD). Thus, it is wise for the taxi companies to raise their prices during these periods to increase their total revenue, as the change in quantity demanded has less effect on total revenue than the change in price.

For example, an increase in price from $2 to $5 as shown in Figure 1. At the price of $2, total revenue is $30m, given by area 0CEG. When price increased to $5 (150% increase), quantity demanded falls less than proportionately from 15m to 12m consumers (20% decrease). Total revenue thus increase to $60m shown by area 0ABF.

Secondly, cross-elasticity of demand for taxies. These are the main taxi holding companies, namely Comfort Delgo Corporation, which owns City Cab and Comfort, Premier Taxis for SilverCab, SMART for SMART Cabs and SMRT Taxis and also TransCab.

In this respect, each of the companies’ services are close substitutes, hence they have positive cross elasticity in relative to one another, which means that a decrease in the price of one good will lead to a fall in the quantity demanded for the other and vice versa.

Thus, usually, the firm will slash price when the competitors lowers price t prevent consumers from turning to cheaper alternatives, which is a “follow-suit” response. However, they could also become oligopolists, colluding to raise price as they are the only producers of taxi services.

For example, in 2006, ComfortDelGro raised fares for all the operators under its umbrella, and SMRT Taxis and TransCab followed suit. On 11 July 2008, ComfortDelGro announced the implementation of a $0.30 fuel surcharge starting from 17 July. Other taxi companies except Prime Taxis followed suit with different implementation dates.