The Impact of Service Refusal to the Supply–Demand Equilibrium in the Taxicab Market

Service refusal is a significant problem in the taxicab market, especially in developing countries where policies and regulations have not been well developed against this unpleasant phenomenon. Understanding the disturbance of service refusal to the demand–supply equilibrium is essential for the governing authorities to develop effective pricing policies and regulations to tackle the issue. This paper proposes a sigmoid function that depicts the service refusal behavior due to the lower-than-expected profit. Integrated with this service refusal function, the interrelation between the fleet size, fare, and passenger demand is well evaluated at an aggregate level. The social optimum and maximum profit solutions are examined with consideration of the presence of service refusal. It is found that in a market with a non-negligible refusal problem, raising fares at a certain level would drive passenger demand as the benefit from relieved service refusal outweighs the negative impact of the markup itself. This is contrary to the common understanding that raising fares will always reduce the demand. The maximum profit and maximum social welfare achievable will drop if the service refusal becomes severer due to higher expected profits. However, at the social optimum the profit could be positive in the presence of service refusal. These properties of the model are demonstrated by a numerical study.