In The Great City, the taxi industry is regulated by the Government Taxi Authority. A company can only supply taxi services, in The Great City, if it is issued a licence by the Government Taxi Authority. (Note: A licence does not place a limit on the number of taxi trips a company can supply.) The market for taxi trips in The Great City has the following characteristics: Inverse demand for taxi trips is given by the function,
P = 90 − Q/1000 .
In this equation, P is the price of a taxi trip, and Q is the total quantity of taxi trips supplied by licensed taxi companies. The marginal cost, to a taxi company, of supplying a taxi trip is $18. A taxi company’s only fixed cost is the cost of purchasing a licence from the Government Taxi Authority.
A) Now suppose that the Government Taxi Authority issues two licenses, to Super Taxis and Blackhall Taxis. Find the equilibrium price and quantities for the case in which the two taxi companies engage in Cournot (quantity) competition. Neglecting the cost of the license, what profits will Super Taxis and Blackhall Taxis earn.
B) Repeat Part A for the case in which the two firms engage in homogeneous goods Bertrand (price) competition
C) Explain why the Government Taxi Authority has an incentive to only issue one license. What problem does the Government Taxi Authority create if it only issues one license?