At rush hour it is virtually impossible to get a cab ride in Bogota or Lima. The last time I went to Bogotá, the line for taxis at the airport was even longer than the queue for immigration. I was tired, it was 10:30 pm and it drizzled. I would have given my kingdom for an Uber, which does charge more if demand is higher. Finally, and after an hour long wait, I got into a dirty taxi after putting my bag in the trunk which was full of packages and at least three opened stale Coca-Cola bottles.
In the regulated taxi market, the client has little choice, no matter that many are willing to pay more for a cleaner, safer, faster and more punctual service, even if the price fluctuates with the supply and demand tides.
Taxi fares are typically set by regulation (Cab meters), and the driver cannot negotiate the fare.
Unless (s)he can, because it is informal.
A recent paper argues that in a framework in which users informally negotiate with the driver before entering the car, taxi drivers transferred to the user the congestion marginal cost, though not in full:
Little is known about how accurately individuals perceive externalities and how this perception affects bargaining behavior. This paper uses the setting of unregulated taxi system in Lima, Peru to analyze taxi drivers’ ability to transfer congestion costs into higher fares, in unregulated taxi systems in which taxi drivers and customers bargain over trip fares. When congestion increases travel times also increase, in this context parties also bargain over who pays a larger share of the uncertain congestion costs. The experiment involved professional commuters hailing taxis and negotiating fares at different times of day between specific locations with alternative route choices as treatments. A total of 1100 trips were conducted following the same bargaining protocol and the randomly assigned route treatments, from which taxi fares, travel times and routing decisions were collected. Results show that taxi drivers increase fares according to route’s expected travel times, but they do not increase fares enough to prevent driver’s earnings per minute from decreasing. Fares for congested trips are one third lower than metered fares’ constructed estimates. Experience drivers learn to avoid congested routes by detouring to longer but speedier routes made out of smaller streets. These results highlight the fact that unregulated taxi systems are successful at generating incentives for taxi drivers to make optimal routing decisions, but they also highlight a driver’s limitations at pricing congestion costs of requested congested routes.
So in transport markets with low enforcement capacity of existing regulations and high informality, market clearing mechanisms can be introduced, however imperfectly.
Innovation can also be informal.