How app-based ride sharing services overcome information asymmetries

London’s mayor Sadiq Khan is in the process of attempting to increase the regulatory burden on Uber and other app based ride-hailing services. The main detail of the current proposal is to require drivers to undergo an expensive English language test prior to gaining a licence. In truth, these new proposals are less onerous than the previous set proposed by Boris Johnson last year, but they again miss the point with respect to what taxi regulation is for.

I travel a lot. I often find myself in a foreign city late at night. Usually, I want to get to my accommodation as quickly as possible from the airport. The easiest way for me to do this should be to get into a taxi and ask the driver to take me there.

However, in an unfamiliar city I will go out of my way to avoid doing this.

Why? Experience. I am likely to be tired. I may be unfamiliar with the local money, I may not speak the local language, I may be unfamiliar with local customs, and with local geography. In the eyes of many taxi drivers, these thing are an invitation to take advantage of me. There are a vast number of taxi scams that take advantage of tired travellers who are unfamiliar with their surroundings.

Normally these are based on one or more of three things. Everything that follows has actually happened to me.

  • The route. The driver takes a long route to increase the fare, or he (or she, but it seldom is) takes you to a different destination than what you asked for, possibly due to being paid commission from a different hotel than the one you want to go to. In the absolutely worst case of this, he may drive you takes you to an isolated or unsafe place, and then demands a larger sum of money than initially agreed upon to take you out of it.

  • The fare. The driver does not turn on the meter, or uses a rigged meter, insists that he does not understand you when you ask him the fare, or insists that he does not understand the word “meter”. At the end of the journey, he then demands four times a reasonable fare. That “fifty” and “fifteen” sound very similar in English is a great boon to this kind of trick.

  • The exchange of money. The driver gives you forged money as change, or claims that you gave him a different banknote than you did, or claims to have no change when you give him a large bill. (People who have just arrived in a country often only have large bills).

When you are in a cab, you do not know the driver’s identity and he does not know yours. He doesn’t ever expect repeat business from you, In the event of a complaint you may have difficulty identifying him later. Even if you can do so via his medallion number or similar (which you were less likely to get because you were tired), you are not familiar with the local police or complaints procedures and may not find it easy to communicate with them. There is no shame or embarrassment for him in taking advantage of you – nobody else is watching.

These sorts of problems are more prevalent in poor or middle income countries, or at least in countries with weak rule of law. These scams do exist in developed countries, but they are much less prevalent. And that is due to regulation. In London and in New York, the meter is usually switched on and charges the fare prescribed by law, and drivers mostly take fairly direct routes.

Yet in these and most other highly regulated places, fares are (or at least were pre-Uber) absurdly high and the number of taxis absurdly low. Barriers to entry – be they numerical limits on the number of taxis as in New York or extremely onerous licensing and training requirements for drivers as in London – created an artificial scarcity of taxis. Regulatory capture occurred, and regulators were protecting the interests of taxi owners or drivers rather than that of customers. The scams did largely go away, but only by creating a privileged class of drivers or owners that were able to profit excessively within the law and at the expense of customers.

This regulatory capture is particularly hard on locals. For locals, repeat business matters, personal reputation of drivers or at least taxi companies matters, people are less prone to fall for money scams, and complaints become more possible. Regulation does not need to be so onerous, and yet locals still suffer the high prices and poor availability that comes from the regulation.

With a ride service like Uber, the scams all go away without needing regulation. The requested destination is recorded in advance. The route is tracked by GPS and may be verified later. The fare is calculated by a third party and paid via credit card, and a refund may be issued if there is any complaint later. The passenger does not pay in cash, so there are no scams concerning the handover of money. The passenger rates the driver, so the driver does care about his reputation. In terms of the safety of the passenger and the driver from each other, both parties are easily identifiable later, so a prosecution is much easier if a crime does occur. In my mind, a certainty that one will be caught and punished if one commits a crime is a greater deterrent than any number of background checks.

As for getting through language difficulties, it’s much easier to type your destination into an app than it is to communicate with a driver when you don’t speak the local language. It’s sometimes easier even when you do. There is no need to discuss the destination, the route, or the fare with the driver. Language difficulties (feigned or real) are part of many scams, but they also make catching a taxi difficult when both parties are honest and genuinely have no common language.

In China earlier this year, I found it very easy to cut and paste Chinese characters into the Uber App on my phone, compare the location I wanted to go to on the map that then appeared with where I thought I wanted to go to, and then click “OK” when I had the right place. I didn’t speak Chinese and the drivers didn’t speak English. This did not matter. If a Chinese person who does not speak English visits London, it’s much easier for him to use an app than to hail a cab, and whether the driver speaks English is almost irrelevant.

While it’s nice if drivers in London speak English, with a ride share app, they don’t actually need to. Riders might prefer it if they do, but they mainly just want to get to their destination by the fastest route for a reasonable fare. In the event that riders do regularly fail their passengers by not speaking English, Uber’s feedback system will deal with this.

Mayor Khan and the regulators are once again missing the point.

3 thoughts on “How app-based ride sharing services overcome information asymmetries”

  1. Posted 21/09/2016 at 20:34 | Permalink

    Didn’t the Chinese government kick Uber out due to their own app based cab’s being better?

  2. Posted 22/09/2016 at 08:10 | Permalink

    What a load of rubbish

  3. Posted 25/09/2016 at 20:05 | Permalink

    Uber wasn’t precisely kicked out of China. As happens with most foreign companies trying to sell to local customers in China, they found that the regulatory environment favoured local companies offering similar services over foreign companies. After battling this for some time, they sold their Chinese service to a competitor (Didi). Uber still exists as a brand in China, and if you use the Uber app in China a car will come in exactly the same was as if you use it anywhere else. Prices have gone up since this merger was announced, but most of the other conveniences of using Uber still exist. Regulation has meant that there is less competition and prices are higher. Fancy that.

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