ComfortDelgro’s Strategic Calculus

Christopher Pang

Up, Up and Away for ComfortDelgro's stock price

Comfort Delgro (CDG) announced that its recent move to raise its fare structure is to “better meet the increased demand for taxis”. The other taxi operators are currently adopting a passive approach, choosing not to react to CDG’s price hike. Why would CDG be eager to make such a move and the other operators not so?

The main difference between CDG and the rest of the operators is not just the supply that it dominates. CDG has a huge shareholding in SBS Transit which dominates the duopoly bus system in Singapore and owns the operating rights to operate North East MRT line. When CDG has a dominant position on the substitutes coupled with highly restrictive barriers (long term operating rights to MRT lines, centrally planned exclusive bus routes, issued taxi licenses plates and driver licences) to entries for public transport, competition is solely lacking, preventing prices from falling and quality of services from improving.

If the demand for taxi services is elastic, the demand for other taxi operators’ services would be higher after 12th December 2011 as compared to CDG taxis. After the price hike, an advanced booking for other operators’ taxi services from city area on a Sunday would be cheaper than flagging a CDG taxi for distances above 10 kilometers. As CDG dominates 60% of the taxi population in Singapore, the demand is likely to shift to buses or trains as the 40% of the supply by other operators reach bottle neck.

This would be a win-win situation for CDG as they continue to get the same income from renting out their vehicles to taxi drivers and still generate extra revenue from the bus and train services. CDG’s taxi drivers would be on the losing end, earning lesser comparatively to a driver that operates under the other operators as now consumers will price seek by waiting for any other taxis other than CDG’s. The drivers operating under CDG would then pressurize CDG to reverse the price hikes or switch to renting from another operator. The dominant position by CDG could prevent the latter from materializing and result in an increase in the turnover rate of CDG’s taxi drivers.

If the demand for taxi services is inelastic, consumers would be indifferent towards CDG’s price structure and the other operators. The taxi drivers renting their vehicles from other operators could be earning more as compared to before December 12 as some price sensitive consumers embarks on price seeking behavior but these drivers would be earning a lower income compared to CDG’s, reflecting the overall inelastic demand for taxi services.

This would also mean the drivers renting from other operators would then be pressuring the companies to follow CDG price structure. After which, CDG would then be raising the daily rental rates on taxi drivers as the higher income of CDG’s taxi drivers proved CDG management’s right judgment and anticipation of the market.

There is very little to lose from CDG’s point of view. The worst case scenario is a public announcement to retract the failed price structure. By maintaining a passive approach to the taxi services, the other operators are taking a safer approach and let CDG test the demand as they can always revise upwards later if the demand is inelastic. Strategically both CDG and other operators are doing what are good business decisions. Only time can tell if the demand is elastic or inelastic when consumers start voting with their dollars.