"Ghost" Taxis, Local Monopoly, and the Market Structure of Saigon Taxicabs

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The Ho Chi Minh City (HCMC) taxi industry is a nascent and lucrative market characterized by high demand and exponential growth in number of companies and fleets. This brings rampant malpractices: fast meters, price-gouging, “ghost” taxis, and Local Monopoly – a unique phenomenon where firms pay a monthly fee to local authorities (e.g. hospitals, nightclubs) to secure monopoly status where their cabs circulate. These complexities compounded by lax enforcements prompted my year-long investigation into the underlying market structure of the HCMC taxicab industry.

After a revision of market structures, I narrowed the possibilities to Monopolistic Competition (MC) and Oligopoly. I explored: a) number and size of fleets, b) competition methods (price and non-price, presence of cartel and collusion), and c) barriers to entry (brand loyalty, economies of scale, infrastructure set-up costs). To answer my research question I designed experiments where I observed for three hours at a time at selected locations governed by Local Monopoly, noting passengers’ choice of transport – “monopoly cabs”, or those flagged and dispatched from other firms. I also conducted interviews and a passenger survey.

The CR4 index calculated from fleet size information alone is a low 29.4%, compounded by large number of firms, seemingly low barriers to entry, lack of collusion and vigorous non-price competition; the industry seems like an MC. However, survey results and Local Monopoly data indicated a high CR4 index (54.7%); big firms enjoy significant brand loyalty or inelastic demand for their product and reap huge economies of scale; market looks more like an Oligopoly. Also, Vietnam’s recent WTO entry leads to the much-needed re-regulation of many industries including the HCMC taxicab market. As sunk or start-up costs increase, “ghost” taxis and small firms would not survive, mergers might occur, and market would likely remain an Oligopoly.

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"Ghost" Taxis, Local Monopoly, and the Market Structure of Saigon Taxicabs

  1. 1. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 1 Anglo-­‐Chinese School (Independent) (Singapore) International Baccalaureate Diploma • November 2008 Henry Bao-­‐Viet Nguyen EE Supervisor: Ms. Alice Tan ECONOMICS EXTENDED ESSAY An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the Ho Chi Minh City taxicab industry Abstract The Ho Chi Minh City (HCMC) taxi industry is a nascent and lucrative market characterized by high demand and exponential growth in number of companies and fleets. This brings rampant malpractices: fast meters, price-­‐gouging, “ghost” taxis, and Local Monopoly – a unique phenomenon where firms pay a monthly fee to local authorities (e.g. hospitals, nightclubs) to secure monopoly status where their cabs circulate. These complexities compounded by lax enforcements prompted my year-­‐long investigation into the underlying market structure of the HCMC taxicab industry. After a revision of market structures, I narrowed the possibilities to Monopolistic Competition (MC) and Oligopoly. I explored: a) number and size of fleets, b) competition methods (price and non-­‐price, presence of cartel and collusion), and c) barriers to entry (brand loyalty, economies of scale, infrastructure set-­‐up costs). To answer my research question I designed experiments where I observed for three hours at a time at selected locations governed by Local Monopoly, noting passengers’ choice of transport – “monopoly cabs”, or those flagged and dispatched from other firms. I also conducted interviews and a passenger survey. The CR4 index calculated from fleet size information alone is a low 29.4%, compounded by large number of firms, seemingly low barriers to entry, lack of collusion and vigorous non-­‐price competition; the industry seems like an MC. However, survey results and Local Monopoly data indicated a high CR4 index (54.7%); big firms enjoy significant brand loyalty or inelastic demand for their product and reap huge economies of scale; market looks more like an Oligopoly. Also, Vietnam’s recent WTO entry leads to the much-­‐needed re-­‐regulation of many industries including the HCMC taxicab market. As sunk or start-­‐up costs increase, “ghost” taxis and small firms would not survive, mergers might occur, and market would likely remain an Oligopoly.
  2. 2. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 2 CONTENTS CHAPTER ONE: INTRODUCTION PAGE • i) A nascent & lucrative industry characterized by high demand & loose regulations 3 • ii) Research question & hypothesis 3 CHAPTER TWO: METHODOLOGY OF DATA COLLECTION • iii) Criteria-­‐based approach to the research question 5 • iv) Research on Local Monopoly 6 • v) Other methods of data collection 7 CHAPTER THREE: PRESENTATION AND ANALYSIS OF COLLECTED DATA • vi) Economic Criterion One: Number & Size of firms 8 • vii) Economic Criterion Two: Methods of Competition 9 • viii) Economic Criterion Three: Barriers to Entry 15 a) Brand Loyalty b) Economies of Scale c) Start-­‐up costs CHAPTER FOUR: CONCLUSION • xi) Hypothesis is incorrect : market is currently an Oligopoly 22 • xii) Limitations & further research 22 APPENDIX 23 BIBLIOGRAPHY 28 ACKNOWLEDGEMENTS 28
  3. 3. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 3 CHAPTER ONE: INTRODUCTION i) A nascent and lucrative industry characterized by high demand and loose regulations Unlike metropolises like New York City with the first taxicabs appearing in as early as 1907 and a smooth functioning system, Ho Chi Minh City (HCMC) witnessed the birth of its taxicab industry in late 19921, and the market has been growing inexorably and uncontrollably ever since. The industry has enjoyed surging popularity, and as demand skyrockets, so does the number of fleets and taxicabs. From only 4,000-­‐5,000 cabs in 2002, HCMC now has about 13,000 cabs, a whopping 150% increase [figures in this essay, unless stated otherwise, are offered by the official authority, Ho Chi Minh City Taxicab Association, or HTA]. This sky-­‐high popularity can be ascribed to basic economic demand determinants (factors that affect the demand of product, such as income, price of other products, or tastes). As HCMC becomes Vietnam’s centre of commerce, service and tourism, the number of tourists and expats climb sharply. Also, the “Vietnam economic miracle” (The Times Online), with growths averaging 8% since the 1990s, has brought about steep rises in local disposable income; compounded by the World Bank’s prediction that only in at least 20 years could the average Vietnamese family afford cheap cars, indeed taxicabs are becoming a familiar mode of transport in this “scooter city”. In fact, 8,000 registered cabs of 37 firms transport about 200,000 passengers every day. The big pie is indeed appealing, and as much as professional integrity counts, some regard profitability higher. Huge demand and loose regulations caused “ghost” taxis to spiral from 500 in 2002 to 3,000-­‐4,000 in 2007. “Ghost” taxis are typically of bad quality in terms of cab and service and have fast meters. In addition, many firms are involved in a unique malpractice called Local Monopoly where a monthly fee is paid to secure monopoly status at a place (e.g. hospital, night club) where other firms’ taxis are not allowed to park. The prevalence of these malpractices results in the loss of consumer sovereignty and an unhealthy business environment. ii) Research Question and Hypothesis The complexities of the dynamic HCMC taxi market, compounded by the fact that very little research has been conducted, and it being a matter of great personal interest prompted me to investigate on the following question for my Economics Extended Essay (EE): What is the underlying market structure of the Ho Chi Minh City taxicab industry? Vietnam’s successful WTO entry in 2007 has led to the much-­‐needed re-­‐regulation of many loosely controlled industries. The HCMC taxicab industry is thus constantly evolving. For instance, latest rules specify that a taxi firm must have an active operator, minimum fleet of 100, and its cabs bear 1 On 8.10.1992, Vietnam Taxi Company – VinaTaxi, was founded as a joint-­‐venture firm between TRACODI (under Vietnam’s Ministry of Transport), and Singapore’s Comfort Delgro Corporation Limited – the second
  4. 4. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 4 recognizable features distinct from other firms; drivers must have at least a Polytechnic Diploma specialized in Transportation, and pass a special English exam2; among others. This EE thus aims to (a) identify the current market structure of the industry, and (b) provide logical predictions on the future market outcome. I hypothesize that: The HCMC taxicab industry is currently a Monopolistically Competitive market generally due to the large number of firms and low barriers to entry; yet it is moving towards an Oligopoly once the new regulations have gotten underway. 2 As a side note, is predicted by the HCMC Police Department that at least 35% of the current legal taxi drivers will fail it, not to mention “ghost” cabbies, many of which have inadequate education. This simply shows how immensely the industry’s landscape will change once the new rules have taken effect.
  5. 5. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan (their market shares and the industry’s concentration) ü Means of Competition/Firms’ Pricing and Output Decisions An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 5 CHAPTER TWO: METHODOLOGY OF DATA COLLECTION iii) A criteria-­‐based approach to the research question The four fundamental types of market structures -­‐ Perfect Competition, Monopolistic Competition (MC), Oligopoly and Monopoly -­‐ hold distinct characteristics summarized below: Figure 1: The four market structures and their characteristics3 We can rule out Monopoly as the industry does not have one single powerful firm (37 firms) and no competition. Likewise, characterized by 100% homogeneous or “identical” products, Perfect Competition is not a reasonable answer. We can thus assume the industry to be an MC or Oligopoly. Narrowing down the options allows us to focus on investigating the characteristics that set these two market structures apart. Although the borderline between them can be very thin, Oligopolies4 are typically dominated a few large, interdependent firms and potential entrants face high barriers to entry, as opposed to MC with many small, independent firms and low barriers to entry. Therefore the criteria for identifying the current market structure and predicting its outcome are: ü Number and size of firms 3 McGee, Matt.(2005). Economics in terms of The Good, The Bad, and The Economist. (p.80).Victoria: IBID Press 4 Oligopoly in Greek literally means “few sellers” (investigation of key characteristics such as price/non-­‐price competition, collusion and the cartel model) ü Extent of Barriers to Entry (deals with brand loyalty, economies of scale, and start-­‐up costs)
  6. 6. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 6 Therefore, all methods of data collection outlined below ultimately target these three criteria. iv) Research on Local Monopoly First mentioned in Section i), Local Monopoly is a unique practice/phenomenon where a taxi firm pays a contracted amount to the administrative authority at train stations, hospitals, night clubs, etc. to obtain “monopoly status” there (i.e. other firms’ cabs are not to park near this place). Monopoly status is usually ensured by violence or gang’s protection5. This malpractice leads to loss of consumer sovereignty: only one firm/supplier and no substitutes available. Worse still, many “monopoly cabbies” would refuse to use the metre and ask for an unreasonably high price6. Aware of this price-­‐gouging, some people insist on calling their preferred dispatch-­‐taxi service, or hailing cabs some distance away. The research’s primary objective is to determine how effective Local Monopoly is compared to Product Differentiation and Non-­‐price competition in securing customers (how this is possible will be elaborated on in Section viii). I observed for three hours at selected places, recording the number of passengers taking 1)“Monopoly cabs”; 2)radio-­‐dispatched or 3)street-­‐hailed cabs from other firms (with names noted down); and 4) other modes of transport (e.g. bus, family transport, motorbike taxis or “Honda om7”). Time standardized for observation was a) 8:00-­‐11:00 for markets (Ben Thanh, Cho Lon, Tan Dinh), and hospitals (Cho Ray, Trung Vuong, Tu Du); b) 20:00-­‐23:00 for night clubs (Borroco, Mua Rung, Volcano), restaurants (Au Pagolac, Kim Café, Quan Ngon), shopping centres (Diamond Plaza, Dong Khoi Street, Parkson Hung Vuong), and hotels (New World, Omni Sai Gon, Windsor Plaza). Tan Son Nhat Airport and Sai Gon Railway Station have large volumes of traffic and were thus observed for both time slots (8:00-­‐11:00 and 20:00-­‐23:00). Days chosen for observation were Tuesdays, Wednesdays and Thursdays as they fall on the middle of the week, and consequently witness steady flows of riders, avoiding the sporadic peaks of passengers during weekends, and doing justice to the fact that some nightclubs are closed on Mondays. Moreover, the 20 places are located in five different districts, and had been carefully selected to be relatively equidistant from each other. This allows for an alternative set of firms’ market shares, as all three segments of the taxi markets (radio-­‐dispatch, “cab-­‐stand”, and street-­‐hailing) are involved. 5 For example, if an imprudent driver from firm S trespasses and parks along the ranks of firm M taxis, and refuses to leave after a “kind” warning from the authority there (security guards, club bouncers, etc.) or the “monopoly cabbies” (firm M’s drivers), he’d probably be beaten up or damage inflicted upon his vehicle. 6 For example a passenger wants to go home in District One, which usually costs VND 50,000 (US$3) per ride. He/she would be asked to pay VND 80,000 with metre off by a small firm’s “monopoly cabby”. Although he/she can bargain, the eventual price would still be higher than the regular fare with metre on. 7 Another popular form of transport in HCMC. In the Vietnamese language, “Honda” (in fact a Japanese brand, due to the popularity of this brand’s motorbikes in Vietnam) means “motorbike”, while “om” literally means “hug”, referring to the speed (and careless driving!) of these motorbike taxis, so the passenger has to “hug” the rider in order not to fall off!
  7. 7. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan Figure 2: Figure 3: VinaTaxi fleet in front of a restaurant SaigonTourist cabs reigning over Dong Khoi street, one of the most popular shopping districts in HCMC. The yellow cab in the picture tries to break away from the jam, not attempting to risk picking up passengers. Figure 4: Gangs from Hong Kong guarantee Monopoly Status for Mai Linh cabs at Cho Lon An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 7 v) Other forms of Data Collection Besides Local Monopoly, I interviewed Mr. Dinh Quang Hien -­‐ HCMC Taxi Association (HTA)’s president, representatives from VinaTaxi and VinaSun -­‐ two big players in the market, and the HCMC Police Department (HPD). I also conducted a passenger survey. I also collected essential secondary data including fleet size information (from HTA), firms’ malpractice records and government documents (from HPD), various Membership cards and vouchers (from VinaTaxi, VinaSun and their websites).
  8. 8. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan Taxi firms registered under HTA as of 15/12/2007 (“n.a”. in the Operator Number column means the particular firm does not have an operator and its cabs are “ghost” taxis. Thus “ghost” taxis can be completely illegal/ owned by individuals; or come from small firms with no operator.) An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 8 CHAPTER THREE: PRESENTATION AND ANALYSIS OF COLLECTED DATA vi) Economic Criterion One: Number and Size of Firms HCMC Taxi Association (HTA) revealed that as of 05/12/2007, there are approximately 13,000 cabs in HCMC: 3,000 illegal cabs and 10,000 legal ones belonging to 37 firms. Large numbers of sellers suggest the industry is an MC market. But just how big are firms? A common indicator of industry concentration is the concentration ratio. Most commonly used, the CR4 index shows “the percentage of market share (or output) held by the largest four firms in the industry”8. Since taxi firms have yet to participate in the stock market, I decided to use fleet size to calculate their market shares, assuming that each cab brings equal amount of sales. The following table is provided by HTA (fleet sizes do not total 10,000 because only 26/37 firms are under HTA) Figure 5: 8 Blink, Joycelin and Dorton, Ian. (2007). IB Diploma Programme Economics Course Companion. (p. 119) Oxford: Oxford University Press
  9. 9. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan AR is the industry demand curve. Since the cartel acts as a monopoly operating many plants, the MC on the left is the horizontal sum of the individual MC curves for firms in the cartel. Profit is maximized where MC = MR. This intersection yields price P and industry output Q. Each firm is thus allocated production quota (q1 here) to ensure industry’s output is at Q. An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 9 Mr. Dinh (HTA’s president) ascertained that the 11 firms not under HTA “definitely have smaller fleets”, and thus the industry CR4 index can be derived from the data with confidence. While Mai Linh Corporation does have the largest fleet size, it is an umbrella of 8 firms with their own sales9 (they do have different Operator Numbers!). Therefore, the four largest firms based on fleet size are: VinaSun (1500), VinaTaxi (895), SaigonTourist (730), and 27-­‐7 (700). The resultant CR4 index is 29.4%10. Referring to the spectrum below, we discern that 29.4% is a low concentration, and ceteris paribus, this implies the industry is an MC. Besides, there are many firms in the market as opposed to a few dominant firms. PC MC Oligopoly Monopoly 0% 50% 80% 100% Low Concentration Medium Concentration High Concentration Figure 6: Spectrum of the CR4 index corresponding to different market structures11 However, the assumption that each cab generates the same amount of sales is largely untrue: many variables are involved, including fast meters, firms’ number of cabs on the road at one time, parking vs. traveling time, etc. Consequently, the CR4 index calculated this way is only a ballpark figure. vii) Economic Criterion Two: Methods of Competition So how do firms compete? Does the fact that all firms under HTA follow the same fare system mean formal collusion and a monopoly outcome12? Suppose taxi firms in HCMC establish a cartel: Figure 7: The cartel model: 9 However, they do share advertising costs and drivers from one firm can easily switch to another. 10 0.294 29.4% 3825 13000 1500 895 730 700 13000 = = = + + + 11 Blink, Joycelin and Dorton, Ian. (2007). IB Diploma Programme Economics Course Companion. (p. 119) Oxford: Oxford University Press 12 In fact, the 11 firms not under HTA use almost identical fare systems, too!
  10. 10. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 10 The interview with its president debunked many misconceptions about HTA. “Membership is completely voluntary. The organization, formed in 1999, aims to protect its members’ common interests and benefits”, Mr. Dinh explained. Although members do discuss the current fares’ appropriateness, they do not have the power to set price. Whenever petrol prices go up (9 times in the past two years) a meeting is held to negotiate a price increase with the Ministry of Transport, where the press is also present. As HTA does not allocate quotas to its members nor set the price, it is definitely not a cartel and the price-­‐regulation ensures no collusion whatsoever. This suggests the industry is not an Oligopoly, but rather an MC. Although price-­‐competition and collusion are absent, firms do engage in non-­‐price competition -­‐ activities that serve to increase sales provided their cost is thought to be more than compensated by the subsequent increase in sales. This is achieved through a process called product differentiation. First, the “products” bear physical differences in terms of cabs Figure 8: A Big Firm (VinaSun)’s cab is new, of good quality and bears distinctive features. It is compulsory for the driver to don a uniform. Also, VinaSun cabs’ lifespan is only 3 years. Figure 9: A Small Firm (No.2)’s cab also bears distinctive features but is not necessarily new or of good quality. The driver usually does not wear a uniform. Figure 10: A “Ghost” taxicab looks plain and bears no distinctive features. Driver does not wear uniform.
  11. 11. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 11 VinaSun’s representative said, “The taxi industry is very lucrative. The pie is still big, and competition is becoming much stiffer as demand skyrockets and number of cabs spirals. We will distinguish ourselves from other players by placing strong emphasis on service and quality of staff.” This seems the strategy established players employ: when interviewed, VinaTaxi’s representative revealed that under the Code of Conduct, gambling on duty (a practice common among local drivers), is subject to 20-­‐30 demerit points and a fine of up to VND 1 million. The firm has a reputation for superior service and its rigorous drivers’ Merit and Demerit System introduced in August 2003. VinaTaxi has won all the three most prestigious awards in the industry in 2004: “The Golden Wheel Award”, “Best Driving Skill”, and “Best Taxi Service Provider in HCMC”. Also, both firms claimed to send staff for training regularly, especially their English skills. (Non-­‐price) competition really is stiff in the dynamic HCMC taxi industry. VinaTaxi has the VinaTaxi Corporate Card scheme allowing companies’ staff to get an account and thus not to pay cash on every trip, while enjoying a discount of 3-­‐20% on every bill which is eventually paid by the companies. VinaSun has a similar Membership Card and special Prepaid Card. Frequent/loyal customers even receive shopping vouchers on top of many discounts/promotions. Figure 12: Firms also distinguish themselves by offering additional services such as airport pickup taxis, 7-­‐ seaters, etc. The bigger players have ventured into the luxury or limousine taxi market, like VinaSun and Future Taxi Company with their VIP pick-­‐up service. Figure 13: Future’s black car/ VIP pick-­‐up service VinaSun Prepaid and Membership Cards. Figure 11: VinaTaxi Corporate Card and Vouchers Figure 14: VinaSun’s quality 7-­‐seater
  12. 12. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 12 Advertising/Branding also exists in the market, although only the bigger firms can afford it. Banners of VinaTaxi, VinaSun, Mai Linh, Future and SaigonTourist can be seen at bus stops and gas stations. The yellow VinaTaxi cab, white-­‐blue VinaSun, and green Mai Linh have become so familiar sometimes they are referred to only by their color. Thus on top of “real”, physical differences, apparently there are intangible ones, too: the perceived value and feel of the “product”. Indeed, the more consumers feel a product to be substantially different, the more successful the firm will be. The following tables summarize various features of non-­‐price competition and product differentiation in the HCMC taxicab market: Type of Taxicab Radio Dispatch Service Insurance Coverage Credit Card/Cas hless Payments Discounts /Promoti ons/Vouc hers Travel Packages/Co rporate Card Services Cabs bear distinctiv e features No. of Seats Big Firms Yes Yes Yes Yes Yes Yes 4, 5, or 7 Small Firms with operator Yes Yes Some No No Yes Mostly 4 "Ghost" Taxis No No Very few No No No 4 Type of Taxicab Overall's Service Staff's Training Staff's English Proficienc y Staff's Courtesy Cab's Quality Dispatch Time Reputat ion Big Firms Best Mostly Yes Adequate /Good Good Varying Quick Good Small Firms with Operator OK Usually No Adequate Okay Mostly New Slower Neutral "Ghost" Taxis Worst No Poor Usually Poor Varying n.a. Bad Figure 15: Product Differentiation and Non-­‐Price Competition in the HCMC taxicab industry. Collective data procured from HTA, HPD, interviews, and question 7 in the Passenger Survey, which asks them to rank foremost factors for choosing a particular taxi service. (Following no operator and involved in price gouging, fast metres and so on, “ghost” taxis comprise of illegal ones -­‐ individually owned cabs, and also those from small firms with no operator)
  13. 13. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 13 So how do taxi firms benefit from non-­‐price competition and product-­‐differentiation? These aim to increase demand or sales of the product, making it less price elastic: Figure 16: Effect of non-­‐price competition and product-­‐differentiation on demand curve: D1 shows the original demand curve with price at P1 and sales at Q1. The shift of D1 to D2 is the effect of, say, Advertising -­‐ the rightward shift allows an increased quantity Q2 to be sold at the original price P1. If the demand is also made highly inelastic, the firm can also raise its price and still have a substantial increase in sales. Thus price can be raised to P2 and sales will be Q3-­‐still substantially above Q1. As people feel competitors’ brands are inferior, firms enjoy raising its price above that of its rivals with no significant fall in sales/total revenues. The substitute effect is small because consumers have been led to believe that there are no close substitutes. Figure 17: Impact of non-­‐price competition on pricing and output: cost of non-­‐price competition causes the AC curve to shift up to AC’. Cost induced is Fixed Cost, and when added to the Average Total Cost of Production (ATC), increase ATC by a greater amount at small outputs than at large outputs. If non-­‐price competition enables quantity sold to increase by a larger proportion than an increase in cost, ATC is lowered.
  14. 14. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan Overall impact of non-­‐price competition on Price, Outputs and Profits: The initial equilibrium output level is at Q1, and Price at P. With advertising, demand for product increase and become less elastic, shifting from AR (Average Revenue) and MR (Marginal Revenue) to AR’ and MR’ and thus a new equilibrium quantity is at Q2, and Price at P’. Before non-­‐price competition: After non-­‐price competition Total Revenue = Area OPAQ1 Total Revenue = Area OP’A’Q2 Total Cost = Area OCBQ1 Total Cost = Area OC’B’Q2 Supernormal profits = Area CPAB Supernormal profits = Area C’P’A’B’ An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 14 Therefore, if successful, non-­‐price competition taxi firms engage in would have the overall impact: Figure 18: This is how it’s supposed to work theoretically. But are firms really successful in securing more customers through product differentiation and non-­‐price competition? Admittedly, non-­‐price competition is present in both MC and Oligopoly. However, the degree to which firms are successful ultimately determines the market structure. Thus the next section on Barriers to Entry is probably the most significant part of the essay.
  15. 15. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 15 viii) Economic Criterion Three: Barriers to Entry a) Brand Loyalty As explained in Section iv), Local Monopoly is a malpractice where firms pays a contracted amount to the administrative authority at places to earn “monopoly status” there, which is sometimes ensured by violence or gang’s protection. As firms have “exclusive parking rights”, “monopoly cabbies” occasionally demand passengers a high price with meter off (price-­‐gouging), and although the latter can negotiate, fares are always higher than usual. Some passengers would walk off to flag other firms’ cabs or call their preferred taxi services. But I speculated that since certain firms have successfully distinguished themselves from others (the previous section thoroughly shows a big-­‐ player VinaTaxi cab is superior to a “ghost” taxi), some don’t mind paying higher price to ride better-­‐ quality cabs and receive superior service. I thus take advantage of this malpractice to find out the extent of brand loyalty big players enjoy by observing at methodically selected locations in the city. Figure 19: Data Collected on Local Monopoly (Although Mai Linh was said in Section vi) to comprise of 8 separate firms, they do share marketing cost and in Local Monopoly, “monopoly status” is shared among them, meaning cabs from any of the 8 firms can park there; * denotes firm is not under HTA). Please refer to the Appendix for full table.
  16. 16. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 16 The table overleaf shows data I gathered from the investigation. Despite several inconsistencies, certain trends are discernible. Firstly, most places with “monopoly status” under firms actively involved in non-­‐price competition and product differentiation see significantly high “monopoly cab” rates: Windsor Plaza (73.4%,“monopoly status” under SaigonTourist), Au Pagolac (67.1%, VinaSun), etc. As explained in Section vii), in economic sense, not only have these firms successfully shifted the demand curve for their “product” to the right, they have made it more inelastic. Since people feel competitors’ products are inferior, these firms enjoy raising price with no significant fall in sales compared to firms not active in non-­‐price competition and with little brand loyalty. At places with “monopoly status” under these “no-­‐name” firms, the flagging/street-­‐hailing rates are high because passengers are not willing to pay higher price for inferior services (in terms of cab, driver, etc.): Tan Son Nhat Airport (44.7%, Airport and Saigon Sasco), Trung Vuong hospital (31.9%, Hoan My/Thanh Thuy), etc. The substitute effect is small for big firms because passengers have been led to believe that there are no close substitutes for their product. Another interesting trend is also observed. Gang involvement ensures high “monopoly cab” rates despite them being from small firms: Volcano (73.3%, “monopoly status” under Ben Thanh), Parkson Hung Vuong (70.1%, 27-­‐7/Mien Dong), etc. This phenomenon is naturally coupled with exceptionally low flagging/street-­‐hailing rates because gangs make sure no other firms can enter the local monopolist’s territory: Borrocco (3.6%, Future/Phu Nhuan), Cho Lon (0.0%, Mai Linh), etc. Although “monopoly status” at these places is usually under small firms with little or no brand loyalty, passengers have no choice but take them because other firms’ cabs are unavailable. Consumer sovereignty is thus extremely low. The research’s primary objective is to determine how effective Local Monopoly is compared to Product Differentiation and Non-­‐price competition in securing customers. From the analysis above, it is evident that firms actively involved in product differentiation and non-­‐price competition build strong brand loyalty that secures them customers even if price is raised. Although it is more convenient to take “monopoly cabs”, Local Monopoly is not effective in securing customers: small firms not involved in non-­‐price competition and with little brand loyalty experience low “monopoly cab” rates. Local Monopoly only becomes effective at the few places where gangs and violence are involved. Because name of firm is noted when passengers choose among “monopoly cab”, flagged cab, and radio-­‐dispatched cab, I could tally up respective firms’ total number of trips in the three taxicab market’s subdivisions (Please refer to Figure 20 on next page). I was excited to find out these numbers support the trends I discerned. When passengers don’t take “monopoly cabs”, they would only opt for a few firms who have successfully distinguished themselves from others: VinaSun (30.9%) and VinaTaxi (19.8%) of total flagging market, Mai Linh (28.4%) and VinaTaxi (25.7%) of total radio-­‐dispatch market. To be quite honest I was surprised by the enormous brand loyalty big firms enjoy, as I thought a short ride isn’t worth the bother of calling or flagging another cab. Also, we could see how non-­‐price competition enables sales to increase by a larger proportion than the increase in cost incurred, and thus Average Total Cost is lowered (Figure 17). Compounded by a rightward shift of the demand and its being more inelastic (Figure 16), Total Revenues increase and the bottom line/Profits are raised (Figure 18).
  17. 17. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 17 Figure 20: Firms’ market shares in respective subdivisions (i.e. Local Monopoly, Flagging, Radio-­‐dispatch), and in total (* denotes firm is not under HTA; “n.a.” means the firm does not have an operator, and thus does not offer radio-­‐dispatch service) Figure 21: Survey Questions 1 and 2 (Please refer to the Appendix for table with full workings)
  18. 18. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 18 The Passenger Survey results strengthened my findings. 64% of respondents “have a preferred taxi brand” and 49.1% “always use service from this firm”. In fact, I didn’t highlight the survey results more because I feel the sample size (53) wasn’t large enough and not representative of the population. Also, I chose not to include question 3 and 5 results13 in the analysis because although people say they would/would not take “monopoly cabs” and “ghost” taxis, they just might in reality due to various factors (urgency, gang involvement-­‐whether they can choose otherwise, brand loyalty-­‐whether they like the local monopolist’s “product”, etc.): their response would not reflect their actual behaviour. Therefore data gathered from Local Monopoly take the front in my analysis. All in all, these primary data fully show the huge extent of brand loyalty big players enjoy in the HCMC taxicab market and its benefits. In fact, the yellow VinaTaxi, green Mai Linh, black Future, etc. Have become so familiar sometimes they are referred to only by their colour14! Although new players can easily enter the market, the enormous brand loyalty certain firms have built makes it much harder for them to gain market shares, and acts as a barrier to entry. This, compounded by low consumer sovereignty (few choices), demonstrates that the industry is in fact already an Oligopoly, despite the large number of firms and seemingly low barriers to entry. Furthermore, because the 20 places spread out the 5 central districts and relatively equidistant from each other; and that all the three subdivisions of the market are considered, an alternative set of firms’ market shares can be calculated (Figure 20 overleaf). The CR4 index for the HCMC taxicab industry (at least in the city centre-­‐where most of the cabs are) would be 54.7%15, significantly higher than the one based on fleet size information alone (29.4%). All things/assumptions considered, this backs up the conception that the HCMC taxicab market is already an Oligopoly. b) Economies of Scale Besides brand loyalty, big firms enjoy large economies of scale, a barrier to entry for new entrants. When the long run cost per unit of output decreases as the production scale is increased, the firm experiences (internal) economies of scale: cost savings enjoyed from large scale production of a firm. (Figure 22 next page) Economies of scale benefit big firms in all three subdivisions of the taxi market. First, large firms can afford higher bids for “monopoly status” at a place -­‐ the top three firms most active in Local Monopoly have “very large endowments”, says Mr. Dinh: Mai Linh (21.4% of the “monopoly cab” market), VinaTaxi (13.2%), and Saigon Tourist (10.6%). Second, within a given geographic area, a large firm has shorter dispatch time because with more cabs in operation, the firm is more likely to have a cab nearby the customer’s location. Third, with more cabs cruising around at one time (larger fleets), large firms’ cabs are flagged more frequently. (Please refer to Figure 23) Moreover, big firms enjoy economies of scale from lower per passenger overhead cost of marketing and management/organization. Take VinaTaxi, for example, with 895 cabs and almost 1500 drivers, the cost of conducting English classes/training per employee to meet requirements is “immensely 13 Please do refer to the Appendix for the results, however, if this interests you. 14 A security guard helping you call a taxi might just ask, “Would you like a yellow cab or a black one?” 15 [Mai Linh] 18.7% + [VinaTaxi] 14.9% + [SaigonTourist] 12.0% + [VinaSun] 9.1% = 54.7%
  19. 19. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan Figure 22: Effect of Internal Economies on Long Run Average Cost curve: As firm expands output, it experiences falling costs per unit arising from internal economies (represented by a movement down the LRAC curve) An investigation: “Ghost” taxis, Local Monopoly, and Internal Diseconomies the underlying market structure of the HCMC taxicab industry 19 reduced”, said its representative in the interview. New entrants would face much higher costs per unit compared to existing firms. These internal economies of scale act as a barrier to entry for new entrants. We can conclude the market is an Oligopoly from their large extent. Figure 23: Internal Economies Big firms enjoy large economies of scale and benefit in all subdivisions of the industry.
  20. 20. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 20 c) Start-­‐up costs As stated in Section ii), not only does this EE aim to identify the current market structure of the industry, it attempts to provide logical predictions on the future market outcome. With the first objective thoroughly fulfilled, we can proceed to the second one. Following more than a decade of negotiations, in December 2006, Vietnam officially became the World Trade Organization (WTO)’s 150th member. Many corrupt industries undergo transformation due to re-­‐regulation, the HCMC taxicab industry included. The HCMC Police Department (HPD) revealed that firms must meet strict licensing requirements, including Figure 24: HTA stamp. Information on the stamp includes HTA’s logo and phone number [8 236 870]; name of taxi firm [here 27-­‐7]; vehicle’s code [283] and cab’s license number [52N-­‐3125]; as well as the expiry date of the stamp [03/2005]. Sample obtained from HTA. Figure 25: the new Taxi Stamp issued by the Ministry of Transportation (validity period of only 12 months) on top of the existent one by the HTA. ü An active operator (i.e. compulsory provision of radio-­‐dispatch service) ü Minimum fleet of 100 ü Minimum 3-­‐year contract of parking space for at least 1/3 of cab fleet ü Cabs must sport the new Taxi Stamp issued by the Ministry of Transportation (only valid for 12 months) besides the current one by HTA. ü Cabs must also bear an identifiable color scheme and distinctive features -­‐ the sides must have firm’s name, operator number, firm’s logo (if any), and an index number. ü Cabs must not be more than 10 years old. ü Drivers must go through a special training course of 80 hours conducted by HTA. At the end of the course, they must pass the exam on top of an English test and must have at least a Polytechnic Diploma in Transportation. Drivers must wear the firm’s uniform. Additionally, drivers will be checked on the street without notice for drug and alcohol usage. Those who violate the rules five times will have their license suspended or revoked. ü Metres must go for twice-­‐annual inspection and a seal placed on them. If a police officer calls for sudden check on the street and that the metre has been tempered with, the driver is fined VND 1,000,000.
  21. 21. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 21 These policies render barriers to entry (start-­‐up costs) high for newcomers. These sunk/fixed costs are not linked to the quantity of output produced; they are constant since they are incurred whether the firm produces or not16. But would they be effectively enforced? Mr. Phuong, HPD’s representative explained that “funding from the City Council” enables HPD to “improve inspector training, construct new vehicle and taximetre testing centres, and conduct undercover operations.” They also have “twelve times as many police officers active on the road capturing “ghost” taxis from June 2007 onwards”. These effectively wipe out small firms and “ghost” taxis. Small firms might merge to benefit from economies of scale and improve their product in order to survive; but the big players would not come together to establish a monopoly due to the taxicab industry’s nature: price-­‐ regulation (government intervention), and anti-­‐competitive-­‐behaviour policies. Consisting of a few large firms competing with high barriers to entry the market would thus remain an Oligopoly. Even though Local Monopoly is to be abolished (firms must have a minimum 3-­‐year contract of parking space for at least 1/3 of cab fleet), big firms who are currently active in the malpractice would still dominate the market because they have built such strong brand loyalty. As price is fixed, firms must cut down costs as much as they can to improve profits. All in all, customers would be the ones who benefit most if firms focus on improving their service and the market tidies itself up. 16 McGee, Matt.(2005).Economics in terms of The Good, The Bad, and The Economist.(p.185).Victoria:IBID Press
  22. 22. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 22 CHAPTER FOUR: CONCLUSION ix) Hypothesis in incorrect: Market is currently an Oligopoly I hypothesized that the HCMC taxicab industry is currently a Monopolistically Competitive market. The large number of firms and low barriers to entry, the market’s low CR4 index calculated from fleet size data, that there is neither Price-­‐competition/ collusion, and that firms engage in non-­‐price competition rather, seem to support our hypothesis: it is a Monopolistically Competitive market. Nevertheless, results from Local Monopoly and passenger survey clearly showed the significant brand loyalty a group of firms enjoy. Although the market has many firms, due to large these internal economies of scale, I concluded the market is in fact already an Oligopoly. Building upon this, I moved on to tackle the second objective of this Economics EE: to provide logical predictions on the future market outcome. Strict licensing requirements essentially act as start-­‐up or sunk costs that, if effectively enforced, wipe out “ghost” taxis and small firms. Mergers would take place, and market remains an Oligopoly. x) Limitations and Further Research This year-­‐long research project is a success because its objectives have been fulfilled. There are also several limitations. For even more reliable data, I would conduct a rider survey with a larger sample size representative of the population. Also, the word limit and criteria set forth by the International Baccalaureate made it unfeasible to delve deeper into the pertinent economic theories, such as Game Theory and certain applications of Econometrics, which would facilitate a more meaningful discussion. On another note, police officers could ask firms to report their earnings to ensure transparency in the industry. It would also be extremely interesting to look into the idea of taxi stands for such a dynamic market as the HCMC taxicab industry.
  23. 23. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 23 APPENDIX These are some of the pictures I took while carrying out the experiments and observing at the places governed by Local Monopoly. Figure 26: VinaTaxi and Ben Thanh fleets at Ben Thanh market Figure 31: Local Monopoly thrives even at places like Tan Son Nhat Airport Figure 29: VinaTaxi fleet occupying the parking lot at Mua Rung nightclub Figure 28: Gangs from Hong Kong guarantee “monopoly status” for Mai Linh cabs at Cho Lon Figure 27: VinaSun monopoly cabs in front of Au Pagolac restaurant in District 1 Figure 30: Mai Linh enjoys “monopoly status” at Saigon Railway Station
  24. 24. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 24 Figure 33: “Ghost” taxis captured in front of Tu Du Hospital on17/12/2007. Figure 34: A police officer jumping on a “Ghost” taxi, determined to stop the brash driver from escaping. Figure 32: During the most recent “Intensive Period of Inspection” 05/12/2007 – 19/12/2007 (the 5th one this year), scenes like this would be seen on the street. Hundreds of “ghost” taxis have been captured. Pictures taken by me and from newspaper cuttings
  25. 25. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 25
  26. 26. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan 17 7 = 41 3 = An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 26 Total (53) Tourists/Foreigne rs (22) Frequent/Corpor ate Rider (8) Non-­‐ frequent/Occasi onal Rider (23) Total (53) Have a preferred taxi company/"brand" 9 = 40.9% 22 8 = 100% 8 17 = 73.9% 23 34 = 64.2% 53 Always use service from this company (brand trumps other factors, such as convenience) 5 55.6% 40.9% 9 22.7% = of = 7 87.5% 100% 8 87.5% = of = 14 = 82.4% of 73.9% 17 = 60.9% 26 = 76.5% of 64.2% 34 49.1% = Figure 35: Results for Survey Questions 1 and 2 Total (53) Yes No Never Heard before Would you take “monopoly cab”? 54.7% 29 53 = 30.1% 53 = 13.2% 53 Would you take “ghost” taxis? 17.0% 9 = 53 77.3% 53 = 5.7% 53 Figure 36: Results for Survey Questions 3 and 5
  27. 27. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 27
  28. 28. Extended Essay International Baccalaureate • November 2008 • Anglo-­‐Chinese School (Independent) Henry Bao-­‐Viet Nguyen • 002329 – 260 • EE Supervisor: Ms. Alice Tan An investigation: “Ghost” taxis, Local Monopoly, and the underlying market structure of the HCMC taxicab industry 28 BIBLIOGRAPHY Blink, Joycelin and Dorton, Ian. (2007). IB Diploma Programme Economics Course Companion. Oxford: Oxford University Press McGee, Matt. (2005). Economics in terms of The Good, The Bad, and The Economist. Victoria: IBID Press Levitt, Steven and Dubner, Stephen (2005) Freakonomics, London: Penguin Books. http://plato.stanford.edu/entries/game-­‐theory/ (Accessed on December 19, 2007) http://www.automoto.vn/newsdt1592,00000.html (Accessed on April 01, 2007) http://www.city-­‐journal.org/html/9_4_new_yorks_unsung.html (Accessed on December 05, 2007) http://www.gametheorysociety.org/ (Accessed on November 30, 2007) http://www.thanhniennews.com/print.php?catid=10&newsid=29444 (Accessed on August 12, 2007) http://www.vinasuntaxi.com (Accessed on April 01, 2007) http://www.vinataxis.com (Accessed on April 01, 2007) ACKNOWLEDGEMENTS Many thanks to the following people for their invaluable contributions to this EE: Mr. Dinh Quang Hien – president of the Ho Chi Minh City Taxicab Association Mr. Phuong – representative from the Ho Chi Minh City Police Department Ms. Minh Huong – VinaTaxi’s representative Mr. Ta Long Hy – VinaSun’s representative and 62 others who took part in the survey and various interviews. My family who provided me emotional support, And Ms. Alice Tan, my EE mentor, and Economics teacher, who sparked my interest in Economics and market structure, and an inspiration, without whom this EE would never have been started.

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