Earlier this month, I finally struck one item off my to-do list. I called for one of the new cabs that are increasingly visible on Mumbai’s roads. Each taxi is fitted with a GPS, or global positioning system, unit. A central control room can locate taxis in the area where you are and ask the driver to pick you up. You get an SMS with the taxi driver’s mobile number and the car number. My cabbie was polite, his vehicle in good condition and I got a printed bill at the end of the journey. Overall, a welcome change from the usual Mumbai taxi experience, though undoubtedly a bit more expensive.

There are not enough of the new taxis on the road as yet, which is perhaps why you have to call more than an hour in advance. But once the numbers grow, the waiting time should ideally drop. The powerful city taxi union bitterly opposed these new cabs, first arguing that they would threaten the livelihood of its members and then saying that Mumbai consumers don’t need expensive options when the cheaper existing taxi service is available.

But consumers now have a welcome choice. And what about the first objection—of destroyed livelihoods? I put this question to one taxi driver who ferried me to office last week in his rattling box. No difference, he said, perhaps a bit optimistically. He could compete against the new taxis on costs and there would always be a market for short trips for which the call-a-cab services would be too slow to respond.

Like many other cities, Mumbai’s taxi market will soon have three competing business models. First, the cabs that cruise the streets and are parked at your building gate. Second, the shared taxis that rush office goers from train stations to their places of work; sharing a taxi dramatically pushes down cost per journey. Third, the ones you call for.

Each has its own competitive advantages and market niches. And greater consumer choice will hopefully improve overall service quality in the long run.

Or will this push up prices eventually? It shouldn’t. The taxi market in most major cities in the world is tightly controlled. City governments fix the number of taxis that can ply the streets and the fares they can charge— and hence total industry profits.

The economic rationale for price control is as follows. The taxi market has information asymmetries—which means that the seller knows more than the buyer. A consumer tends to sit in the first taxi that comes his way and has little idea whether the fare quoted by the cabbie is worth accepting or whether he should wait for another taxi, or yet another. He cannot compare prices without high transaction costs. So, a government body fixes taxi fares. (That’s the theory: we all know that haggling can be quite aggressive and effective in some smaller Indian cities.)

So, overall industry profits will be steady. But how these profits will be distributed between various types of taxi services will undoubtedly change.

How should existing taxi owners respond? Other parts of Indian industry had faced this question in the mid-1990s. Small retailers face it today. Their response was to modernize, invest in computer networks to control costs, use capital more efficiently and accept a shakeout.

Modernization would entail investing in new and better taxis. Then there is the question of using capital more efficiently; essentially more journeys in a day. GPS would help. But some taxi men will also have to exit the business.

It is the last that will be, as always, the most painful. Mumbai had dramatically expanded the supply of taxis in the 1990s to break the union’s power to keep asking for higher fares. And even though no new taxi licences have been given since 1998, there still seems to be oversupply in the market. Most taxis spend most of their day parked at street corners.

But who will buy a taxi licence and allow the existing holder to exit? Another impoverished Bihari? The current earnings of a taxi driver are too low. Taxi licences are rented out on a daily and monthly basis.

That’s where the persistent rumours about a large business house getting into the taxi market has buzzed around the cabbie grapevine. One taxi driver told me that the going rate for a Mumbai taxi licence is Rs25 lakh, but he knew nobody who had actually got that much money for a licence.

This phantom buyer feels that future profit flows from running a taxi and being protected from free entry by competitors has a capitalized value of Rs25 lakh.

That’s in tune with global experiences. Taxi licences in cities such as New York, London and Hong Kong do not come cheap. Mumbai could be added to that list. But what does a large company have that a freelance taxi driver doesn’t?

The answer is simple: capital needed to upgrade services and take advantage of a huge market.

Your comments are welcome at cafeeconomics@livemint.com