Face/Off: The adverse effects of increased competition

Increased competition can result in market efficiency. However, alternatively, it may provoke unethical behavior by sellers attempting to avoid losses—a risk that may be greater in credence goods markets, where consumers find it difficult to determine the value of goods or services received. The New York City (NYC) taxi market allows us to investigate how increased competition due to the launch of green-colored taxis (to serve only certain parts of NYC) may lead to fraudulent behavior by drivers of the established yellow taxis. An empirical study of more than 17 million matched yellow taxi trips revealed that fraudulent behavior was most prevalent on routes in which drivers faced increased competition for both pickups and post-drop-off pickups. However, after the launch of green taxis, there was no significant change in the trip distances of yellow taxis for rides subject to a flat-rate fare or for trips to/from office buildings where passengers were more familiar with optimal routes.