Question

Please listen to the podcast about "Taxi Kings (Links to an external site.)" on Planet Money, NPR, July 31, 2015 (re-broadcast 2018) and answer both parts of the prompt in 250+ words. Be sure to proofread for typos and other spelling/grammar mistakes. After you have listened to the podcast: Briefly summarize the story and describe how the monopoly originated. How and why is the taxi monopoly changing? What is the impetus for change and is it a fair outcome? AND 4. Explain a situation of price discrimination which you have experienced in a market. Did you pay a higher or lower price than others? Why or why not?

Answer 1

3) New York City's Taxi Cabs are renowned all over the world. The most valuable thing about owning a NY taxi however, isn't the taxi itself. Instead, its the little medallion bolted to the front of the cab. Each taxi medallion is extremely coveted, with only about 13000 in existence today. The city controls the number of medallions in circulation, driving down the supply and making each medallion that much more rare and expensive - a single medallion was priced at about $1.2 million dollars each in 2015. This is a classic example of a monopoly - a single seller (New York City, in this case) with the ability to regulate price and quantity, drive supply down, making each unit sell for more. Gene Friedman, also known as the Taxi King, owns over 1000 of these rare medallions alone - each carries a name, documentation, and Friedman has a personal connection to each one. The value of all his medallions easily surpasses over a billion dollars in value.

The taxi monopoly is rapidly changing, however. Initially, one would have to wait on the streets of New York to be able to successfully hail a cab. Now, thanks to automation and the introduction of market players like Uber, street cabs have seen a sharp reduction in demand and subsequently, the value of the old-fashioned taxi medallions is plummeting.

Gene Friedman inherited the Taxi business from his father, after he passed away due to a heart attack. Friedman's father owned about 8 cabs, running the business like a mom and pop store, taking out loans to buy a few cabs and have them run in the city. His son, however, was proficient in finance, and had the epiphany to buy the coveted medallions, thereby buying into a monopoly. Friedman knew bankers, and could secure low interest loans to finance his venture of buying more and more medallions, since he viewed them to be prime real estate. Friedman's father disagreed, but his son was adamant - he used this model to buy medallions and when their price rose, he offered them as collateral to get even more loans. A one man medallion hedge fund - the taxi king mimicked the Lehman brother's model right before the financial crash of 2008, racking up massive debt to buy assets whose price he assumed would only rise.

How can a taxi bring in enough revenue to pay off millions of dollars in debt? The answer lies in generating a steady income source. Teams of drivers are used for the cabs so that they aren't idling in the garage, but are out making money in day shifts as well as night shifts. Now, all these drivers pay Friedman the same amount of rent for the cab (around $125), regardless of how many passengers they get in a day. As long as this rent amounts to enough yearly revenue to pay off the loans, the system works. This process built the taxi king's empire.

The taxi industry's bubble that Friedman created didn't pop, it faded and crumbled slowly with the inception of Uber. Now, the passenger/consumer/demand side of Uber's entry into the market was rarely the issue - the main problem was posed on the supply end, by the cab drivers in question. To retain his drivers, Friedman was forced to lower the rent he receives from each driver. Now, even this is manageable according to the taxi king; the real problem occurs in exactly the area that built his empire - finances. As the cheap loans came due, banks got nervous about the taxi industry and refrained from lending any more money to Friedman's venture. Now, banks are realizing that if Uber can run the same vehicles without the medallion, then perhaps the medallion isn't worth as much as it was valued to be - their market is drying up, since banks refuse to provide liquidity and buyers and sellers for this commodity has become incredibly scarce. As his footing faltered, and banks started foreclosing on his medallions, Friedman claimed the taxi industry was too big to fail, and suggested that the city of New York bail out its yellow cabs by paying off the loans.

The outcome of Friedman's rash borrowing seems fair. He continued to make money via the taxis - had he simply conducted business the way his father had, instead of financing his ventures via debt funding, he wouldn't have faced any issues. As of 2018, Citibank foreclosed many of his medallion assets and New York refused to bail him out. The price of his medallions have plummeted - each selling for under $2000. On top of this, Friedman was accused of avoiding payment of fees for each cab to New York City, though his drivers collected the fees. He was facing major jail time, until he pled guilty to lesser charges.

4) Price discrimination is the situation where different batches of consumers are made to pay different amounts for the same commodity. This exists in monopoly or monopolistic market situations, where the monopolist is the price maker. Price discrimination is of the first, second or third degree. First degree is when the firm charges the highest possible price for the product/service. Second Degree is when a firm charges different prices for different quantities bought. Third Degree is when prices differ based on consumer groups.

I have faced an instance of Third Degree Price Discrimination - When I purchased airline tickets from Indigo Airlines, My parents and I had to pay more for the same seat since we were adults, whereas my little sister paid fair less for the same seat, since she is a child. This is a classic example for third degree discrimination on the basis of consumer groups. One consumer group (adults) had to pay a different fair, and another group (children) had to pay a different fair for the same service.