Uber Innovation?

Uber is innovating, but that doesn’t mean it can do so in its current form. The American company intends to replace traditional taxis, notably by offering everyone the opportunity to drive as a way to supplement their pay. By doing so, it has gotten into trouble with Belgian law. It is now clear that the company can no longer legally continue to offer its services without changing Brussels taxi regulations. Is this kind of change desirable? One argument has been consistently made against this background: Uber is innovating, and obstructing this innovation would be unacceptable.

Uber is indeed offering a series of innovative products for the Brussels taxi market. The most tangible of these includes the use of a Smartphone interface which allows users to call the closest vehicle, even if it’s not in view. This saves both passengers and drivers time. The application also facilitates automatic payments. Moreover, its rating system allows users to “deactivate” drivers with the worst passenger reviews.

These are attractive products, but they do not necessarily justify a revision of current regulations. On the contrary, as is the case in other countries, the Uber application could certainly appeal to the traditional taxi network.

Flexibility Taxis Don’t Have

In fact, Uber is truly unlike other taxis because of its ability to adjust the size of its vehicle fleet. A major operational cost for taxis is the time they spend driving around empty looking for clients. Uber has an undeniable advantage in this regard. During peak time, it increases its fares, which attracts more drivers. When there are fewer potential passengers, it can reduce the number of cars by lowering its fares. Uber vehicles thus drive around empty less often and additional cars are available when the need arises.

Uber drivers are largely responsible for this flexibility. Since some of them are not full-time drivers, they are free to drive during the most profitable periods of time and don’t congest the market during off-peak periods. It is difficult to picture traditional taxi companies acceding to this kind of risk.

Uber minimizes commuting costs whilst guaranteeing improved profitability for drivers on duty. But is this enough to justify a revision of current regulations? Nothing could be less certain.

No Competition

While the free market is one of our economy’s supporting pillars, it does not always function in an ideal manner. The taxi sector is often specified in this context. It must be noted that in the absence of guiding regulations, competition becomes difficult.

There are many disputed reasons for this. We frequently say that waiting for a taxi costs the user time and it is therefore preferable to get into the first one you find, even if the price is unreasonably high — passengers are even forced to pay such prices when they go to taxi stands.

Moreover, it is hard to calculate the real cost of each commute. This particularly depends on the time it takes for a taxi to find a passenger and get to his or her destination. Since they poorly evaluate prices and are not able to compare competitors’ offers, passengers are ill-equipped to negotiate fares. Being left to its own devices, competition thus rarely manages to lower taxi sector prices. Service quality can also suffer from this.

In light of this problem, authorities often prefer to limit market access, impose quality standards and establish pricing systems that protect users. This is what the Brussels region has done.

The region issues a limited number of licenses. Any vehicle that does not have this door opener is considered illegal.

In return, taxis in Brussels must satisfy a number of comfort, security and environmental standards. In particular, drivers must undergo training and take out special insurance.

These demands are largely incompatible with the flexibility that Uber currently enjoys — and they partly illustrate the difference between taxi prices and Uber’s prices. Someone driving for Uber will definitely not want to invest in a high-end vehicle and expensive training without any coverage. Uber would deprive itself of its current flexibility by offering guarantees to its drivers.

A Pro-Region Choice

The Brussels region is in the midst of revising its taxi regulations. It will therefore need to choose between the guarantees offered by the current system and Uber’s proposed effectiveness, as well as other similar services. This will be no easy task. To date, there is a lack of empirical studies on the economic impact of companies like Uber. Additionally, the number of elements that need to be considered — price, time limits, security, pollution, transport for persons with reduced mobility, etc. — tends to limit the emergence of a single solution. This is thus a question of preference and priority.

What is certain is that today’s taxi drivers are fighting their final battle. Twelve years from now, autonomous cars will begin to emerge and the issue of taxi regulations will once again be raised. This advent will once and for all blur the difference between private cars and taxi services. Current regulations will become obsolete. On that day, nothing will be able to save these drivers. Radical innovation always ends up winning. This is what Schumpeter called “creative destruction.”

Dirk Auer is a PhD Student in Competition Law at the Liège Competition and Innovation Institute (LCII), ULg