Congestion charges under market power: An application to ride hailing in Bogotá, Colombia
Job Market Paper (download)
The rapid growth of ride-hailing services over the last decade threatens to worsen traffic congestion in cities worldwide. Economists usually prescribe a Pigouvian tax or congestion charge, equal in size to the marginal external cost of congestion, to treat this illness and contain excessive growth. However, ride-hailing markets suffer from another imperfection. They are usually concentrated in the hands of very few digital platforms like Uber. Platforms can then exert market power and raise prices above competitive levels. Under these two conditions (negative externalities and market power), the optimal congestion charge is smaller than the marginal external cost and may even turn negative. In this paper, I build a structural model of ride hailing to compute the optimal congestion charge for a ride-hailing market monopolized by a digital platform. I calibrate the model to the morning peak period in Bogotá, Colombia, in 2019 and find that the markup imposed by the monopolist platform (in the form of a gap between the prices charged to riders and paid to drivers, usually known as platform commission) covers about 70% of the marginal external congestion cost of ride hailing. As a result, the optimal congestion charge corresponds to only 40% of this external cost. The optimal charge takes into account that the platform adjusts prices in response to the charge, which causes an incomplete pass-through of the charge to riders.