April 17, 2012 8:55AM

How Tech Can Render Regulations Uber Obsolete

In the most recent issue of The Atlantic, Megan McArdle looks at the regulatory travails of Uber, the innovative smartphone-enabled car service that has found itself in the crosshairs of competition-averse taxi commissions from D.C. to San Francisco. For the uninitiated, Uber is the answer to the question that has occurred to every harried commuter with a smartphone at some point: If these things have GPS chips, and cabs have GPS, shouldn't I be able to use my phone to find a cab, rather than just hoping I'm in the right place when one passes? In other words, it's the Electronic Thumb from The Hitchhiker's Guide to the Galaxy. Uber's plush sedans come at a premium price, but for those in need of a pickup outside a high-traffic area, it's the convenience factor that justifies the markup. Users register their credit cards with the service in advance, and when they need a ride, fire up a slick app that shows all the Uber cars in service on a realtime map, with an estimate of how long the closest free driver will take to reach your location. At the end of the journey, the fare and gratuity are charged automatically, with a receipt and travel map delivered via email, and the app gives passengers an opportunity to rate each driver—allowing the company to ensure that it only contracts with those who are consistently safe, reliable, and courteous. By most accounts, users adore it.

Naturally, regulators hate it. DC Taxi Commissioner Ron Linton has condemned the company as a scofflaw—and seems hell bent on finding some rule they're violating, even though his initial complaint against Uber seems to have been legally confused. Most of Linton's public comments on the matter leave the distinct impression that these are secondary details for him: What's outrageous is that some upstart would dare to do something new without first coming to kiss the Don's ring and beg permission. There's also the inevitable element of regulatory capture: Conventional cab companies would rather not face an innovative competitor, so they're asking the government to ensure consumers don't have the option of taking their business elsewhere. So far, a familiar story that could be told about dozens of industries. What even many of Uber's defenders seem slow to recognize, however, is that the company's business model doesn't just require regulators to catch up with the tech and the times: It eliminates the rationale for having a regulator.

The default in a free society is that you can start most kinds of business, and charge whatever rate the market will bear for your services, without the approval of some municipal bureaucrat. The argument for treating cabs differently rests on the idea that, on the conventional model, they're not as effectively regulated by normal market pressures. Comparison shopping isn't particularly feasible when you hail a cab the old fashioned way: You just flag down the first one that happens to pass, with the understanding that when the ride's over, you're unlikely to ever do business with that particular driver ever again. If you're from out of town, odds are you won't ever do business with the company again either, and barring an exceptionally unpleasant experience, most passengers aren't going to take the time to call the dispatcher with a review. The opportunistic, one-off nature of traditional cab transactions, in short, makes a standardized price structure more attractive, and diminishes the reputation-based incentives to compete on price and quality. So goes the usual argument, anyway.

Uber—or rather, the Uber model—changes all of that.

You accept a price structure in advance, when you sign up for an account, and can be clearly notified of any price changes. The app's  review system makes it easy for the company to monitor driver quality without demanding too much effort from passengers. Customers automatically get a full and instantaneous accounting of when and where they were picked up and dropped off, and how much they paid. Because the company expects, and strives for, lots of repeat business—and on word of mouth from satisfied customers as a growth strategy—all the normal market forces and incentives that apply to any other online business are in full effect. Which means the question isn't whether the regulations need to be updated to accommodate a new kind of cab service: It's why this kind of service needs a regulator at all.

Judging by Linton's own assessment of the conflict in the Washington Post, the commissioner at least vaguely understands that Uber makes him superfluous. His attempt to justify a continuing need for regulation—for consumers to be "protected" from a company they're overwhelmingly flocking to defend—is a small masterpiece of incoherence:

[A Post contributor] suggest that taxis or limousines arranged for via smartphone technology be allowed to charge whatever they want in an all-out price war. He should be careful what he wishes for. It isn’t just riders and drivers who would be affected if such a system became the norm. Given the congestion, confusion and pedestrian hazards likely to result, those using private vehicles, buses, bicycles, trucks and even sidewalks to move about the city would be sure to share their unhappiness with public officials, leading us right back to what? Regulation, of course.

To which the sane reader can only say: What? At the risk of stating the obvious: What Linton calls "all-out price war" to make it sound radical and anarchic is what the rest of us call "competitive pricing," and is the normal way businesses operate in this country. Absent extraordinary circumstances, which smartphones obliterate here, it turns out it works pretty well. As for congestion, confusion, and pedestrian hazards... what, exactly, makes these likely to result? And how does Linton know? Is there even one scintilla of evidence that this has happened in other cities where Uber operates? Why would anyone think professional drivers—especially ones being rated on each ride—create more "pedestrian hazards" than other motorists? Why would buying a service online at clearly posted rates yield more "confusion" when the service is transport than it does for every other type of service people can purchase online? Wouldn't greater adoption of smartphone-enabled cabs yield less congestion by efficiently matching drivers with fares?

The answers to these questions are obvious enough: On the Uber model, any rationale for subjecting driving services to a special regulatory regime—beyond the rules that apply to every business—simply evaporates. With smartphones on a fast track to the kind of ubiquity cell phones already enjoy, that model seems likely to become the norm rather than the exception over time. But as Upton Sinclair famously said, "it is difficult to get a man to understand something, when his salary depends on his not understanding it," which means bureaucrats like Linton are sure to keep clutching at any pretext to justify their jobs.