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The Effect of Elevation in Competition on Markets for Credence Goods: An Investigation on the NYC Taxis
Authors: Iman Ahmadi (Warwick Business School, UK)
Although conventional wisdom suggests that higher competition increases efficiency in markets, it may turn out to an opposite situation in the markets for credence goods in that higher competition may provoke unethical behavior from the sellers’ side to avoid losses (i.e., hypermotivation). We focus on credence goods due to their inherent challenge in being evaluated in terms of the quality of a good or service that a consumer receives (e.g., repair service, healthcare, and taxi market). In this study, we focus on the taxi market in NYC, and we investigate the effects of elevation in competition (i.e., the launch of green-color taxis) on the fraudulent behavior of existing sellers (i.e., yellow-color taxis). In particular, we examine whether (and consequently how) higher competition for pickups or post-dropoff pickups in NYC increases the distance of yellow taxi trips, indicative of the fraudulent behavior of yellow taxis. We investigate the effect in four competitive zones (CZs) depending on whether yellow taxis: (i) have a monopoly over pickups and post-dropoff pickups (CZ I), (ii) have a monopoly over pickups but compete with green taxis for post-dropoff pickups (CZ II), (iii) compete with green taxis for pickups but have a monopoly over post-dropoff pickups (CZ III), or (iv) compete with green taxis over pickups and post-dropoff pickups (CZ IV). In an empirical study of more than 190 million yellow taxi trips in NYC, we find that after the launch of green taxis and depending on the CZ, yellow taxis may increase the distance of trips subject to the two-part rate fare (i.e., trips that their fare is calculated based on distance and/or duration of the trip), suggesting an increase of fraudulent behavior among yellow taxis because of higher competition in the market. The (average) magnitude of increase in fraudulent behavior: (i) is highest among trips where yellow taxis compete with green taxis for both pickups and post-dropoff pickups (CZ IV), (ii) followed by trips where yellow taxis compete with green taxis only for pickups or only for post-dropoff pickups (CZ II and CZ III), which are indicative of both "current-looking" and "forward-looking" behavior of yellow taxis. Intuitively, these findings suggest that higher competition in the taxi market in NYC (due to the launch of green taxis), lead to hypermotivation among yellow taxis to compensate for their loss through an increase in the distance of trips, consequently, trip fare. We, however, do not find any evidence indicative of a significant change in the distance of yellow taxi trips subject to a flat rate fare (i.e., trips that their fare is fixed, which applies to trips between JFK international airport and Manhattan) after the launch of green taxis, providing incremental support for the validity of our findings.