The SCU Taxi

By Erin Economist

            A freshman at Santa Clara University, Sarah was anxious to earn a little extra money.  It did not take her long to realize that her staying in and watching movies while everyone else was out at parties on the weekends could actually become rather profitable.  Not one to partake in drinking, Sarah concluded that with her car, she could establish a taxi service to shuttle around those who were not in the proper state to drive.  Curious as to what prices she should charge for her service, Sarah looked around and discovered that she had not been the first to propose such an idea.

            Matt was a sophomore in a neighboring dorm who, like Sarah, had discovered this potential market a year ago.  As he had been unable to fill all requests last year, he was not disappointed to add a little competition.  In fact, Matt was able to provide Sarah with all the information she needed to get up and running.  When Sarah asked him about his pricing strategy, the two decided that it would be in their best interest to collude and form a cartel.  This way, they would take on the same number of customers each night at the same prices that maximized profit.  Instead of competing with each other, they realized such a decision would be much more profitable, as they could agree upon the monopoly outcome.  Thus, Sarah and Matt got together and started posting flyers and sending out email advertisements about their service.  They set up one phone number for people to call, from which they would divide the customers equally.

            For the first three months of school, their operation ran without problems.  Friday and Saturday nights, the duo put in a movie and waited for the phone to ring.  They alternated who took each call and were able to make good, and equal, profits for the night.  However, soon after that, Matt began to grow antsy.  He had been saving for four years to buy a new car and he was getting close to all he needed.  He realized that if he was simply able to get a larger share of the market, he could have his new car by the next quarter.  He began making excuses to Sarah that he had homework to do and it was easier if he just took the calls and then called her with the information for every other customer.  Sarah naively agreed and soon, her customer total each night began to decrease.  Yet, Matt was picking up even more customers than before, driving late into the night.

            However, Matt was greedy.  Cheating Sarah out of a few extra customers each night was not raising his profits as much as he would like.  Therefore, separate from Sarah, he began raising prices.  The customers were intoxicated anyway, and would not know the difference, right?  Sarah continued charging the price upon which they had agreed, completely unaware of Matt’s actions.  However, it was not long before Matt’s greediness began to hurt them both.  Since they were still using one telephone number between the two of them, customers never knew who would be their driver, and thus, how much they would be charged.  Eventually, Matt’s prices were so high that his customers decided they were better off walking than paying such exorbitant amounts on their college budgets. 

            Sales fell dramatically, and poor Sarah, who had remained in agreement with everything upon which the two had originally colluded, was barely making enough money each night to warrant remaining in business.  Matt, who had cheated at his little game, was not much better off, and could not understand why his profits were decreasing when all he was doing was taking a bigger percentage of the market and increasing his prices.  What he did not realize was that though he had a bigger share of the market, when he moved away from the profit-maximizing monopolistic market he had shared with Sarah, he unknowingly decreased the total customer market.