Sometimes, people and businesses start out by trying to avoid regulation, and then discover that some basic ground rules aren’t such a bad thing after all. At an extreme, you have those who went long Bitcoin because they didn’t trust banks or the government, only to find that the Magic: The Gathering online exchange didn’t have federal deposit insurance.
I’ll take a little inflation risk and a slightly lower yield in exchange for deposit insurance and a numeraire currency, and I’m not just saying that because I was a Washington Mutual customer.
Uber is the latest entrepreneurial anarchist to embrace regulation. In late October, Uber’s blog touted the passage of the Vehicle-For-Hire Innovation Act in Washington, D.C., as “a watershed moment: 14 U.S, jurisdictions have now adopted permanent regulatory frameworks for ridesharing, a transportation alternative that didn’t even exist 4 years ago.”
Car-sharing companies like Uber, Lyft and Sidecar are being to recognize that basic safety regulations may help customers to trust them. These are new companies offering a new concept and entering an industry where there isn’t a great history of trust. Many people have had bad experiences with taxi drivers who can’t find an address, run up a fare, avoid certain neighborhoods or won’t pick them up. If that’s how customers are treated by regulated cabbies, some consumers might reasonably ask, what will a bunch of regular people driving better cars to do them?
I’m a regular Uber user in Chicago and I’ve been happy. So have enough people in enough places that the company has been able to expand to Sao Paulo and Milan, Akron and Wichita. Drivers use their own cars and the electronic infrastructure is easy to scale. Hence, start-up costs are low, and many of these cities do not have extensive taxi services in place. Uber has tended to raise more outrage in places where people rely on taxis to get around, not just getting to and from the airport.
Uber once resisted any regulation, insisting that it wasn’t in the same business as taxis and that, evenif they were, the taxi industry was regulated in order to protect the medallion owners from competition. The company entered new markets without waiting for regulatory blessing. As Uber and its counterparts have become more established, and as they have sought to reach a wider customer base, they have begun to accept some basic rules of the road. The new rules in D.C. give customers some assurance that there is recourse if their driver is careless or predatory.
Now that more major cities have accepted Uber and its counterparts, the ride-sharing industry has gained legitimacy. It will be interesting to see what happens next. Will competition play out so that the best provider wins? Will the streets become a free-for-all with every driver looking to pick up every pedestrian? Or as these upstarts become established, will they, like the taxis before them, turn to regulation in order to cement their positions?
The history of regulation shows that the latter is likely over the long run. In new and young markets, regulation can help grant legitimacy. At its root, regulation means to “make regular”; it is intended to help buyers and seller set expectations for fair trade. Competition is essential, but there can be costs associated with a free-for-all in which the terms and risks of trade are less than fully transparent. Think of all those poor Mt Gox account holders believing their Bitcoin wallets was safe.
Once regulation is established, however, the fun work of regulatory capture begins. Finding ways to exploit the regulatory process becomes more important than serving customers. It brings us right back to the situation that made Uber possible in the first place: taxi drivers who can’t find an address, run up a fare, avoid certain neighborhoods or won’t pick up potential customers. The regulation became a way to support the monopoly profits of the medallion owners rather than the livelihood of the drivers or the needs of the customers.
Until that happens, enjoy the ridesharing. Calling a car right to your house beats walking two blocks in the snow, and having a driver who knows how to use a GPS service to find an odd address is much better than driving in circles. The fact that ridesharing is often cheaper than a taxi makes it even better.
Although, in my humble opinion, regulators need to do one more thing to make ridesharing legitimate. They must outlaw those hideous pink mustaches, to make American cities even more beautiful.