An Alternative Approach to Market Frictions: An Application to the Market for Taxicab Rides
This paper illustrates an alternative approach to modelling frictions. Frictions are not assumed to exist, but are shown to arise endogenously as a distinctive feature of the set of equilibria that correspond to a particular range of parameter values. To avoid building frictions in the environment, the information imperfections typically assumed in search-theoretic models are eliminated. In addition, the model’s spacial structure and the agents’ moving decisions are explicitly spelled out, allowing the number of contacts that occur to depend on the way agents choose to locate themselves. It is shown that some heterogeneity among locations is necessary although not sufficient for the equilibria of the model to exhibit frictions. An aggregate matching function is shown to exist, and its behavior with respect to changes in parameters such as the distances between locations, the agents’ payoffs and the sizes of the populations of searchers on each side of the market is completely characterized. Finally, the model is used to quantify the e¤ect of a recent change in taxicab fares on the process that rules the meetings between passengers and taxicabs in New York City.