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In New York, which has the largest ride-for-hire fleet in theUnited States, licenses have been issued for 13,437 taxicabs. Thereare an estimated 42,000 drivers in the city, with a licensedvehicle being used by two or three drivers a day. In 2014, only 6%of cab drivers in New York were born in the United States, and 36%came from Bangladesh and Pakistan. The New York taxi fleet picks up600,000 passengers per day. An estimated 25,000 livery cars providefor-hire service by prearrangement and carry 500,000 passengers perday. 10,000 “black cars” provide services mostly for corporateclients.

Regulators have long required that taxicabs available to behailed on the street be licensed. The license is to ensure that thetaxi service is safe and reliable, and that fares are fair.For-hire vehicles must be insured to cover drivers and passengers,meet safety standards, and (if taxicabs) have a sealed meter.Regulations also require that licensed cabs be quickly and easilyidentifiable. This is normally achieved by a distinctive color(e.g., yellow). Cabs must also display whether or not they are inservice.

Taxicabs charge a regulated fare, set by a government agency,based on the time and distance of the trip, as measured by a meter.Some trips to and from established destinations, such as anairport, may have a fixed price and will displayed in the cab.Taxicabs are required to carry standardized meters that must beprominently displayed, are sealed and periodically checked toensure that the proper fare is being charged. Limousine servicesare generally prohibited from charging fares based on time anddistance, and they do not carry a meter. Typically, fees are basedon time, often with a minimum billed time. The fee normally has tobe agreed on in advance.

In many jurisdictions the licensing system limits the supply oftaxicabs. One common variant of licensing is the medallion systemthat is used in cities such as New York, Boston, Chicago and SanFrancisco. Medallions are small metal plates attached to the hoodof a taxi certifying it for passenger pickup throughout a definedarea (normally metropolitan boundaries). When the medallion systemwas first introduced in New York in 1937, the idea was to make surethat taxi driver was not a criminal luring passengers into hisvehicle. To get a medallion, the taxi service has to adhere to theregulatory requirements in that jurisdiction and be approved by theappropriate regulatory agency. Medallions may be given toindividual taxi drivers who own their own cars, but more typicallytaxi companies that own fleets of cars acquire them. The taxicompanies then lease cars and medallions to drivers on a daily orweekly basis. In some locations the driver may own the car, butlease or purchase the medallion from an agent who has acquired it.An example would be Medallion Financial, a publicly traded companythat owns hundreds of medallions in New York, sells them toaspiring young cabbies, and arranges for loans to finance theirpurchase.

In cities that utilize a medallion system the supply ofmedallions has often been limited. The rationalizations for doingthis include ensuring quality, guaranteeing a fair return to taxicompanies, and helping to support demand for other forms of publictransportation, such as buses, trains and the subway. It has alsobeen argued that limiting the number of cabs helps to reducecongestion and pollution.

In practice, the supply of medallions has often not kept pacewith growing population. In New York, Chicago and Boston forexample, the number of medallions issued has barely budged sincethe 1930s. In New York, there were 11,787 medallions issued afterWorld War II, a number that remained constant until 2004. By 2014there were 13,437 medallions issued in New York.

Medallions can be traded. Thus, over time, a secondary market inmedallions has developed. In this market, the price is not set bythe agency issuing them, but by the laws of supply and demand. Theeffect of limited supply has been to drive up the price ofmedallions. In New York, taxi medallions were famously selling forover $1 million in 2012. In Boston the price was $625,000. In SanFrancisco the price was $300,000 and the city took a $100,000commission on the sale of medallions. The average annual price ofmedallions surged during the 2000s. In New York, prices increased260% between 2004 and 2012. The inflation adjusted annualizedreturn for medallions over this time period in New York was 19.5%,compared to a 3.9% annual return for the S&P 500.

As noted above, drivers often do not own the medallions. Thereare three players in many taxi markets: the medallion holders(often taxi companies) who have acquired the right to operate ataxi from the regulatory agency, the taxi driver, and taxi dispatchcompanies. A taxi dispatch company is a middleman or broker, whotypically matches available cabs with customers and takes a fee forits scheduling services. While an individual taxi driver may own amedallion, most often taxi companies own them. Tax companies own afleet of cabs, which they lease out to drivers (with a medallion).A minority of drivers may own their own cab. In New York, about 18%of cabs were owner operated in 2014, putting most medallions in thehands of taxi companies.

In New York, regulations allow medallion owners to lease themout to drivers for 12-hour shifts. The critical problem facing adriver is that they must get access to a medallion in order to makea living. Due to this, companies that own medallions can extracthigh fees from drivers. There are also reports that some taxidispatch companies use their position as schedulers to extractpayment in the form of bribes from drivers in return for goodshifts.

Drivers, who legally are viewed as “independent contractors”,can begin a 12-hour shift owing as much as $130 to their medallionleasing company. They may not break even until half way throughtheir shift. One consulting company report found that in 2006 adriver’s take home pay in New York for a 12-hour shift averaged$158. In 2011, the New York transportation authority calculatedthat it was $96. A study of taxi drivers in Los Angeles found thatdrivers worked on average 72 hours a week for a median take homewage of $8.39 an hour. The LA drivers were paying $2000 in leasingfees per month to taxi companies. None of the drivers in the LAstudy had health insurance provided by their companies, and 61%were completely without health insurance. Given the compensation,it is perhaps not surprising that some drivers can be rude,impatient, and prone to drive fast and take poor care of theircabs.

The LA study noted that because city officials heavily regulatethe taxi business, taxi companies are active politically, payinglobbyist to advocate their interests and contributing to thecampaign funds of local politicians. The same is true in New York,where the medallion owners trade association, the Metropolitan TaxiBoard of Trade, lobbies hard to influence public policy. In 2011,for example, medallion owners were initially able to block plans tocreate a fleet of green “Boro” cabs to serve New York’s outerboroughs. They argued that doing so would drive down the price oftheir medallions. In June 2013, however, the New York Supreme Courtoverruled lower court rulings and allowed the licensing of Borocabs to go ahead. The intention now is to issue 18,000 new licensesto green cabs. These cabs, however, will not be able to pick uppassengers in lower Manhattan, which remains the territory ofyellow cabs.

Analyze the competitive structure of the taxi marketsuch as New York prior to the introduction of Uber?