Uber and Lyft: The Case for Real-Time Ridesharing Services

In an industry defined for decades by commercial licensing, Uber and Lyft pose an existential threat to both entrenched taxicab companies and regulators. In their short lifespans, the two newcomers have already suffered intense legal retribution for the game-changing services that they provide. In San Francisco, Washington D.C., Chicago, Vancouver, Toronto, and, most recently, in Virginia, Uber has run afoul of municipal licensing laws and has received strongly worded “cease-and-desist” letters. Earlier this month in London and other European cities, outraged taxi drivers attempted to eliminate their new competition by blocking traffic at airports and busy intersections until government complied. The result? An estimated 850% increase in Uber signups within a week.

So what do these innocuous-sounding startups offer that threatens to effect a paradigm shift in personal transportation?

In a word: connectivity. Uber and Lyft are both pioneers of real-time ridesharing technology. A customer downloads the companies’ respective apps on his smartphone, requests a car at his location, and tracks his driver’s real-time progress until the car arrives. Because the apps are linked to the GPS system in the customer’s phone, a driver can determine precisely where the customer is waiting without the customer having to relay his location over the phone in instances where the customer is unclear of his specific location. Indeed, the Lyft app goes even further than its competitor’s, allowing the user to input his destination before entering the car, eliminating the hassle and confusion of the driver inputting the address into a separate GPS while driving.

Importantly, Uber and Lyft apps make ridesharing easy by giving customers the option of splitting fares with their friends through their phones. If the fare-splitting request is accepted, the credit cards of all the users will automatically receive equal charges. Since this system eliminates the need to count change and avoids the awkwardness of loaning friends money, it significantly reduces the transaction costs endemic to the traditional taxi experience.

Yet the innovation that these companies bring to the table extends beyond user convenience. Unlike traditional taxis, Uber and Lyft adjust rates based on weather and traffic conditions. During holidays, rush hour, severe storms, and other times of peak demand, for instance, Uber implements what it calls “surge prices.” This variable-pricing model has two major benefits. First, it allows companies to effectively ration the supply of scarce resources, thereby reducing car shortages when the cars are most needed. By pricing casual users out of the service during emergencies, for example, this practice helps ensure that the people who most need rapid and reliable transportation will receive it.

Second, surge pricing allows cars to be run profitably at lower rates during non-peak times. This benefits both the companies and their customers: it allows companies to hit multiple segments of the market simultaneously and it takes into account key differences in the customers’ opportunity costs. For some urbanites, the value of a quick trip home at rush hour exceeds that of higher rates. Others may choose to wait strategically for traffic to die down before embarking on their commute. Either way, Uber’s and Lyft’s easily accessible, real-time rate quotes allow customers to organize their commute in whatever manner makes sense for them.

Uber and Lyft also offer drivers a considerably better deal than traditional taxicab companies. Throughout the 20th century, stringent licensing requirements aimed at reducing the supply of and increasing the demand for taxis provided near-insurmountable barriers to entry. In New York, for instance, the “medallions” that drivers must own or rent to drive a cab currently trade for as much as $1.3 million apiece. Prospective drivers typically have to lease a medallion from their companies. In contrast, Uber and Lyft drivers are ordinary people who drive their own cars. An Uber driver in New York who works 40 hours or more a week makes a median income of $90,766 after Uber’s 20% commission fee but before the costs of gas, insurance, and car repairs that drivers must cover. Comparatively, Yellow Cab drivers in the Big Apple net roughly $44,860 after amortized lease payments but before fuel costs. Low overhead costs allow the ride-sharing companies to grant 80-95% commission rates to their drivers.

Although standards for ridesharing companies are more relaxed than those of their taxi counterparts, company policies adequately address concerns of driver and customer safety. In addition to screening drivers through sex offender registries criminal databases, Uber rejects all applicants with DUI, hit and run and insurance-related violations in their driving history. While UberX relies on drivers’ personal insurance as primary, it insures each driver up to $1 million in excess for any injuries inflicted (states such as California require this by law). Regarding training, Lyft requires prospective drivers to train with mentors who inspect their cars and assess their driving skills. Unlike traditional cab companies, UberX drivers are not licensed, nor do they incur penalty points for traffic violations in the same way that cabs do. Nevertheless, both Lyft and Uber have stringent quality control policies in place, automatically firing any drivers whose ratings fall below 4.8 and 4.7, respectively. Policies such as these ensure that the best drivers will gravitate away from cab companies toward the ride-sharing innovators.

Much of the ire the two companies have received from regulators stems from their indeterminate regulatory status. Uber and Lyft are not taxicab businesses, but car services. In the coming months, regulators should recognize the immense market potential of these innovative startups by emulating the state of Colorado which, as of June 5th, officially recognized ride-sharing services in return for fairly non-intrusive regulations. The market is moving in one direction: forward. If official are to honor their commitment of upholding the public interest, they would be well advised to let the services operate freely.