Spatial Equilibrium and Search Frictions - an Application to the New York City Taxi Market∗ Ida Johnssonz March 18, 2018 Abstract This paper uses a dynamic spatial equilibrium model to analyze the effect of matching frictions and pricing policy on the spatial allocation of taxicabs and the aggregate number of taxi-passenger meetings. A spatial equilibrium model, in which meetings are frictionless but aggregate matching frictions can arise endogenously for certain parameter values, is calibrated using data on more than 45 million taxi rides in New York. It is shown how the set of equilibria changes for different pricing rules and different levels of aggregate market tightness, defined as the ratio of total supply to total demand. Finally, a novel data-driven algorithm for inferring unobserved demand from the data is proposed, and is applied to analyze how the relationship between demand and supply in a market with frictions compares to the frictionless equilibrium outcome. Keywords: spatial equilibrium, matching, industry dynamics, taxicabs JEL codes: ∗I would like to thank Professor Hashem Pesaran and Professor Hyungsik Roger Moon for their guidance and support. zDepartment of Economics, University of Southern California. Email:
[email protected] 1 Introduction The distribution of taxicabs in big cities tends to be imbalanced, in some areas passengers have a hard time finding a taxi, in others taxis can’t easily find a passenger. In the taxi market, trades occur bi- laterally between agents, and the equilibrium outcome depends on the nature of the meeting process. For example, the matching mechanism between yellow cabs in New York and passengers, who have to hail the cab from the street, is different than for ride-hailing services such as Uber or Lyft that match passengers and cabs using an algorithm.