Are Traditional Taxi Firms Doomed? An Answer from the Capital Market

Entry will occur most rapidly in a market where entrants incur few or no sunk costs, do not operate at a cost disadvantage, and where consumers can easily switch from the incumbent to the entrant. The purpose of this paper is to evaluate the speed of entry in an in industry that is highly contestable, taxi rides. In recent years, firms like Uber have entered the transportation business offering a ride service that competes with the traditional yellow cab service. Uber drivers have a lower cost structure than the incumbents, sunk costs are minimal, and they are able to enter the market knowing that the incumbent’s price is sticky downwards due to municipal regulations. These industry attributes have led many an observer to comment that the rents or profits earned driving a yellow cab will quickly wither away, or stated differently, the yellow taxis have little long-term market power. Despite these favorable entry conditions, I use capital market data to show that taxi operators have been betting that market power will persist for well over fifteen years.