Taxicab Regulation in Japan

This paper proposes a model of a cruising taxicab industry under laissez faire pricing and free entry, and compares it with alternative regimes including collusive fare setting, collusive restrictions on entry, or both. In the model, under laissez faire, prices are determined by Nash bargaining with complete information and lie above marginal costs. Under laissez faire pricing and free entry the number of vacant cabs need not be efficient and could be either higher than optimal or less depending upon the relative bargaining power of individual cabs and potential customers. Under collusive control of entry, the number of vacant cabs will be set at the efficient level given the prices, which if set collusively will be above the laissez faire prices. These findings shed new light on the political success of cartelizing regulation of the cruising taxicab industry such as that observed in Japan. JEL classifications D40, L43, L51 and L92.