Impact of Menu Pricing for Taxi Services with Double-Sided Private Information

Taxis are classified as a public transportation mode that is speedy, convenient, and provided with 24-hour-per-day availability. The taxi’s fare structures are different across cities, and is often determined by local governments. These pricing regulations from governments not only alleviate information asymmetry between the driver and customer, but also avoid the price war among drivers. However, typical current taxi fare structures, which is composed of initial charges, distance-based charges, and delay-based charges has been pointed out that is unfair and sometimes causes the inefficiency of the taxi market. Dissimilar with other studies which make efforts in improving the taxi fare formulas, this study tries to mix menu pricing with traditional fare structures. In this study, we propose a game-theoretic model to discuss the interactions between the driver and the customer. We then use game theory to derive analytical solutions. We first discuss the moral hazard only model, in which the driver can decide the taxi speed. We then add hidden information, customer urgency, into the model to discuss the impact of the adverse selection problem. Equilibrium strategies are then derived. We discover that when the taxi driver can decide her speed, menu pricing improves the efficiency of market with or without the adverse selection problem. In addition, it is shown that adding menu pricing as an option into traditional metered pricing can induce higher taxi speed and cause a win-win situation. In conclusion, menu pricing is a valuable pricing scheme for taxi industry and should be investigated further in the future.