An Uber Challenge to Tacky Taxis

Advocates of government regulation have a list of reasons why the free market may fail to live up to the textbook ideal of a perfectly competitive industry. Markets, for example, might be monopolized. They might entail negative externalities like pollution. Or they might suffer from “asymmetric information,” leaving uninformed customers dependent on the honesty of unknown sellers.

This last bugaboo is often a rationale for regulating taxicabs. Now, the upstart Uber cab company has a business model that seems to solve the taxi industry’s asymmetric information problem. Instead of congratulating them, though, regulators seem intent on keeping Uber out of the Washington, D.C., taxicab market.

Under traditional taxi service models, consumers are at an informational disadvantage when hailing a cab. Since they can see the cab only from the outside as it screeches to a halt, people can’t tell whether the inside is clean, whether the driver is well-kempt, whether he will drive safely or whether the price is reasonable.

So, the argument goes, government regulators like the D.C. Taxicab Commission can solve the problem by establishing uniform codes of conduct and by pre-screening drivers for the consumers’ benefit. To this end, the commission establishes detailed cost and quality regulations, mandating everything from the per-mile fare that cabs may charge to the appropriate shade of carmine (or is it chestnut?) with which to paint cabs. Ideally, these rules make sure that cabs and their drivers meet the highest standards of quality and customer service.

 How’s that working out?

 Let’s turn to the data. The average Yelp customer assigns Yellow Cab Co. of D.C. 1.5 out of five stars. The most common rating, by far, is one. Yellow Cab’s rival, Diamond Cab, isn’t much better. It, too, has an average rating of 1.5 out of five. As with Yellow Cab, the most common rating is a one.

Enter Uber. The new transportation company roiled the Washington market last year when it let customers summon clean, luxurious sedans to their location with the push of a smartphone button. The innovative aspect of Uber’s business model is that it solves the asymmetric information problem. After each ride, customers assign a vehicle and its driver a score on a 1-to-5 scale. Uber monitors these scores. Too many threes and fours, and the driver has to find another job.

When customers book a cab, they can see the average rating of the driver. If they deem it too low, they can cancel and rebook a different driver. This feature means that every Uber driver competes with other Uber drivers. The customers win. Once again, let’s turn to the data. D.C.’s Yelp customers give the company four out of five stars. The most common rating is a five.

How are regulators reacting? Last year, the D.C. Council proposed legislation that would blatantly discriminate against Uber. The proposed legislation would mandate that Uber charge no less than five times what taxis charge. In a spectacular show of candor, the legislation included language stating that the rationale is to ensure that Uber “does not directly compete with or undercut taxicab service.”

The council eventually backed down (though not without handing Uber itself a small privilege by excluding its competitor, SideCar).

Now Uber has a product called UberX. It relies on the same smartphone technology but allows users to summon small, fuel-efficient vehicles instead of black cars and SUVs. The service aims to offer better and cheaper service than taxis.

The D.C. Taxi Commission should be thrilled that Uber solved the asymmetric information problem and seems to provide customers with excellent service. They should be especially glad that Uber now plans to offer a low-cost version of its services.

Instead of a thank-you note, however, the commission is serving up a new set of regulations that threaten to keep UberX out of Washington. The rules outlaw the sort of midsize, fuel-efficient vehicles that happen to be used by UberX. This, of course, is no surprise to people who study how market players sometimes use regulators to block competition. Regulators often are captured by the very industries they are intended to regulate. In this case, it appears the commission is more interested in serving the extant D.C. taxi operators rather their customers.