Economics of platform markets

Posted on May 7, 2016  /  0 Comments

gettaxi1Senior Research Fellow Payal Malik has co-authored an op-ed on surge pricing in the taxi market that addresses some key issues of platform markets. The distinguishing feature of platform markets is the lowering of transaction costs through the use of ICTs. State action to prohibit such applications is retrograde. Instead, what should be done is to remove no-longer-justifiable constraints such as rigid and limited issuance of licenses.

The state fixes two parts of the taxi market. First, it limits supply by mandating a permit for operating a taxi, thereby making the supply of taxis very inelastic. Second, it fixes the price of the service. Unfortunately, this price is rarely the equilibrium price because changing exogenous factors move demand and supply, leading to a fluctuating equilibrium price. For instance, during peak commuting hours or severe weather conditions, demand usually exceeds supply at the mandated price. At off-peak times, the opposite is true. Both situations are inefficient as mutually beneficial trades remain unrealised.

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