Introduction

The microeconomic theory explains perfect competition as a market structure that both buyers and sellers have the power to set the price of the homogenous product. The taxi industry in Athens could be considered as one is that there are a large number of firms each with an insignificant share in the market. This is because a taxi cab cam only transports an average of five people in a trip at a go, therefore a truly small extent clearly, since increasing the number of passengers has no effect on the cost of gas. Taxi services are offered by a wide range of companies such as Apollon, Enotita, Aseteras, Glyfada and Athina 1 as well as international ride-sharing companies such as Uber. However, uber offers its service as only UberTAXI after it suspended the UberX service after a change in legislation which imposed stricter regulation on the sector.

Research question

The is a positive economic impact of the Taxi industry in Athens. How is the taxi industry in the city of Athens an illustration of a perfect competition market?

Research approach

The theory to be researched in depth include the following:

• Characteristics of a perfect competition market
• Externalities of the taxi industry and how it conforms to perfect competition market

The data used will be gathered through secondary sources.  These secondary sources include economic textbooks, newspaper articles, government publications and research from think tanks such as KEPE. These sources will inform the formulation and findings of the research.

 

 

Research Methodology

Characteristics of perfect competition

The taxi market has grown at a fast speed, owing to its increasing demand sharing and the ability to book for taxis on online booking applications. In recent years innovations in technology have evolved the taxi business, these involve making bookings and payments via smartphones.

Nevertheless, conditions present for perfect competition are strict, it results in there being a few perfectly competitive markets which entail the following assumptions.

In the market, there is a large number of buyers and sellers in the firm, and therefore the seller can only supply a small part in the total production of the service offered in the market. As a result, neither customers nor the sellers can affect the prevailing prices since no single firm can neither influence the market price nor the market conditions present. Therefore price is determined by market forces of demand and supply and each firm would consider the price as given below:

 

P=price

AR= average revenue

MR=marginal revenue

The demand curve for the market would be firmly inelastic, indicating that the taxis can sell any amount of output at the prevailing market prices. This demand is because every single firm is said to be a price taker, and uses the stipulated price for the whole industry. No firm can set their prices any higher given the fact that they will not be able to sell their products at all and neither can the rational seller lower it below the market price as well given the fact that it can sell its commodities at the prevailing market price.

Subsequently, there is perfect knowledge of the firm. This knowledge is due to the availability of information freely about the firm devoid of time lags in the flow of information, for example, the fare prices for taxis, which means risk-taking is minimal, and the entrepreneurs’ roles are limited.  So if a taxi company like Apollon were to hike its rates above the market price, a substantial substitution effect would take place mainly if the quality of service is relatively similar to that offered by other competitive taxis in the market. Many of its customers would replace their option of using its services and opt for a cheaper alternative to other taxis services like Enotita or Glyfada. For that reason, it is assumed that both the buyer and the seller will make coherent decisions to maximize their self-interests, with customers looking to maximize utility while the sellers maximize on profit.

Into the bargain, the perfect knowledge elucidates the lack of aggressive product promotion through advertisement, and it is also marketed by word of mouth by their customers from one’s personal experiences, influencing heavily the decision to choose whose services to use to achieve an optimal level of satisfaction. This satisfaction is achieved by satisfying the users’ experience in providing the service by taxi drivers.

 

Additionally, this market structure is also characterized by ease of entry and exit into the industry. The decision for taxi companies to join or leave the market by a firm is profoundly made by the firm themselves, with the reasoning behind this theory is that if super-normal profits are arising from the industry.  New firms attracted into the industry due to the earnings that the already existing firms are amassing as this is made possible by freedom of entry and exit into the industry. This results to shift in the supply curve whose effect is felt as it lowers the prices. Due to the availability of supply, its impact in turn results in a decrease in price thus super-normal profits deteriorates to healthy profits in the long run. This deterioration gradually continues until the economic profit approaches zero consequently prompting firms to exit the industry. If the firms do not register any profits, they may leave the market as there are no exit barriers. Therefore, the market is open to invasion by new competition at any time but later on affects the long run profit margin made by each firm in the industry (BC Eaton, The Economic Journal pp7)

Last but not least, there is the mobility of factors of production. Factors of production include labor, capital land, and investment. Mobility in factors of production exists either vertically or horizontally, and its flexibility depends on the mobility of said factors. Mobility can be classified into three main categories:

• a) Geographical mobility
• b) Horizontal mobility
• c) Occupational mobility

Geographical mobility

This geographical essentially means that the factors of production change in the site they are located in, except land which is geographically immobile. For example labor, a taxi driver can pick up a passenger from the National and Kapodistrian  University of Athens and take them to the Benaki museum easily due to the mobility of the driver.

Horizontal mobility

This points towards the desire of laborers for moving from one industry to another but in the same place but still retaining the same occupation.

Occupational mobility

It is a complex mode of mobility for factors of production with the reason being that it necessitates knowledge and technological efficiency, experience and dynamism. The invention of new technological advancements and their use in the industry among the labor force that may require the provision of training and reorientation. For instance, the emergence of uber taxis services that enables a client to call for a taxi up to where they are situated rather than the hailing of taxis, where the client can assess the quality of service and even rate the driver as well.

However, mobility can also be subdivided into two more compartments as it seeks to explain the mobility of its factors of production.

Capital mobility

If compared to labor, capital has less mobility, but the capital goods are used to produce different types of goods and services. Additional income is pumped into the market either via investments or plowing back profits and transferred to the taxi industry if there are signs of development. So capital has the mobility to bring about changes in the volume of production.

Land mobility

The land is immobile and hence cannot experience mobility as a factor of production as it cannot shift from one area to another but the yield is originating from it may be shifted to different areas. This land is considered also to possess the characteristic of mobility. This mobility enables a way to introduce new techniques and increase their output in the market

Benefits of perfect competition.

It can be argued that perfect competition yields the following benefits:

1. Only normal profits are realized; hence sellers cover their opportunity cost.
2. Expenditure on advertising is not necessary since there is perfect knowledge of the market and can also rely on word of mouth as a means of product promotion by their customers depending on the experience their customers had with them.
3. Due to perfect knowledge, there is no lack of information as its evenly shared between all participants.
4. Existing firms cannot develop any monopoly power as there are no barriers to entry in the market.
5. Perfect competition can achieve the maximum possible consumer surplus and economic welfare as well.
6. There is a maximum allocation and production efficiency when the equilibrium occurs where price (P) =marginal cost (MC). This equilibrium means that the production is achieved at the lowest resource cost possible given the level of production of other products.

Externalities in the market for taxis in Athens as a perfect competition

Although the taxi market possesses a lot of the attributes present in perfect competition, it also lacks in some as well. It is assumed that there are no externalities in the production and consumption of services in the perfect competition market and therefore no variance in cost the social and private expenses incurred as well as its benefits. However, there are small inconsistencies in the taxi market concerning perfect competition.

The taxi sector in Athens has been regulated in terms of fare and entry control, with its objectives being to correct certain shortcomings in the taxi market. An essential distinction in the different modes of taxi distinction is amongst quantity regulation, quality regulation and the ethics of market conduct regulation. Quality regulation encompasses the standards of the vehicles, driver as well as the operator. Therefore, this is more of a safety regulation measure to ensure the wellbeing of the clients using taxis as their preferred means of transport and driver as well. It also looks to safeguard the company’s car is up to par and safe for use as commercial means. Quality regulations on the other hand mainly include price regulations and entry restrictions while market conduct regulation consists of rules regarding the picking up of passengers, modes of conducting themselves professionally or even an association with a radio network.

Firstly, there are barriers to entry and exist, a quantity regulation. Restrictions of entry to the taxi market have been incorporated in many cities around the world like Athens, but in hindsight, they have been degrading their markets with the most common explanation being the protection of taxi drivers incomes. Other reasons include environmental concerns such as air and noise pollution caused by the circulation of taxis within the city. As a result, the most common tool for inhibiting entry is charging relatively high prices for the acquisition of taxi licenses, therefore, creating an escalating difficulty in acquiring authenticated licenses. According to the Ministry of Transport in Greece, a specific percentage of ownership of the overall licenses in a particular area will be issued with Athens receiving only 5% whereas half of the taxis in Greece are located in the city of Athens (GRReporter 06/10/11). This regulation means that they set restrictions on the supply of taxis following the city’s acreage and populous. By increasing the difficulty in acquiring licenses or significantly raise management cost, local authorities can control the number of taxies in the city and at the same time gain revenue from taxes collected.

In addition to other factors also make it difficult for taxi drivers such as rise in price of gasoline as has the consumption tax imposed on fuel while still amid of security safety concerns such embezzlement by their customers, bad weather hampering their ability to carry on with their job harassment by traffic officials as well as car breakdown.

 

 

Secondly, there is an avid government interference case in point the Greek Transport Ministry Bill to restrict taxi apps. This interference may force E-platforms offering taxi services to shut down according to Greek daily TA NEA, app developers offering ride-hailing services were required to have entered in a three-year contract with taxi drivers and operate as taxi companies. Also, the government might enforce quotas on the number of taxies within a city.

 

The graph is an illustration of the effect of enforcing a quota on many taxis in the city. This effect causes the equilibrium quantity to shift to the left from Q0 to Q1 and hence the price at which the passengers have to pay shifts from P0 to P1.

Furthermore, irrational pricing and differentiated service are also an externality of perfect competition in the taxi market. Since it necessitates that the taxi driver is the price taker and has no impact on the market price whatsoever and that the prevailing market price is determined solely by the forces of demand and supply thus creating a perfectly elastic demand curve and that the profit maximization point should be where marginal revenue (MR) = marginal cost(MC). Nonetheless, the existence of franchising of taxis has affected the market price since not all drivers own the vehicles they use and not all vehicle owners drive the taxis. In reality, most taxis are owned and operated by a different taxi firm and contracted to individual owners. The drivers have to pay a fee from the revenue they have generated from the job to the taxi firms as per the contract agreement stipulated. Due to the location of the different parts of the town and the route used, providing different levels of quality of service thus differentiated experiences for the customers the more the likelihood to charge at different prices. For example, Uber X which offers luxury rides will cost higher than Enotita does to its clients due to the different levels of customer satisfaction.

 

 

In addition to, the assumption of both the clients and taxi drivers rationality is put to question by behavioral economists since can be subjected to bias as well as the rule of thumb ‘guidance’ when they are faced with severe and complex situations (D Kahneman,2003).

Correction of externalities

 

Although achieving a perfect competition is almost impractical due to its hypothetical nature, the externalities can be reduced for the taxi industry to mimic an ideal competition market through the following ways:

First and foremost, the reduction of licensing fees set by authorities to lessen the financial burden constraining the taxi drivers. This way more people will be willing to use taxi services due to lowered price charges and create an easier means of entry into the market by taxi firms as well.

Secondly, regulatory authorities to loosen restrictions of quotas on taxis therefore not limiting new taxis entering the market, in turn, letting the market naturally resolve and set the appropriate sellers. Furthermore, the equilibrium will return to its original position making it more favorable for the customer to use taxis as a result in a fall in prices.

Also, setting and implementing service standards such as vehicle and driver safety

Consequently, it creates employment opportunities as more new taxis enter the market as well as reduce social collisions on the emergence of illegal taxis since each person is accountable to their decision to enter and leave the market.

Finally, the government should step aside from and deter from the practice of setting standard price lists for taxis but move to provide more solutions to resolve the conflicts arising on different levels of service to attend to respective target groups. Adoption of a new pricing system that is based on other factors such as stoppage times during the trip between the destinations rather than just the mileage alone.

 

Conclusion

In conclusion, having deduced our data from the basis of evidence and reasoning drawn above, the market for taxis can meet the criteria for perfect competition market structure as it virtually comes into agreement with the assumptions set for the market and fulfilling them reasonably. Moreover, an ideal competition model can be a useful yardstick that evaluates levels of competition that exist in the real taxis market in Athens. Nevertheless, perfect competition in the real world cannot exist without stable and favorable market conditions and regulations. The occurrence of externalities such as barriers to entry and exit in the market, government interference like the imposition of quotas, regulation of taxi licenses as well as safety regulations and product and service differentiation of service offered by firms in the taxi market. However, these externalities can be corrected in various methodical processes, to reduce the extent of their interference in the perfect market. With these characteristics paired together with the simple assumptions such us mobility of factors production and excellent knowledge of the market by both buyers and sellers, reassures that in Athens the extent to which the taxi market is a representation of perfect competition is accurate, and it complies with the set rubric.

 
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