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Taxi Company Weaves Out of L.A.'s Regulatory Traffic Jam

A taxi company in Los Angeles has found a way to allow passengers to hail cabs through their smartphones, notching a victory in the city's regulatory civil war.
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A taxi company is innovating – and that could be the key to avoiding an all-out regulatory war.

Bell Cab Co., which runs about 300 cabs in the greater Los Angeles area, is using software from San Francisco's Flywheel Software Inc. to allow passengers to get and pay for cabs through their smartphones.

It is more than just a small deal between a local taxi company and a software startup. In fact, it is a big deal if you worry about the effects of regulation on a business.

L.A. has been the Gettysburg of a regulatory civil war, a bruising, bloody battleground where businesses are using every means available to wipe out competition. On one side are the innovators, namely ride-sharing companies like Uber, Sidecar  and Lyft that entered the LA market earlier this year with technology-rich alternatives to the age-old problem of hailing a cab. On the other side, are the old-school taxi companies that have been loathe to innovate because they benefit from what is essentially government control of their industry through a web of rules and regulations.

The fight has been costly for both sides. Taxi drivers have taken to the streets and slowed traffic to protest what they say is the unfair advantage these new companies have. New companies have faced the specter of being shuttered. In the end, it is still no easier to get around in the city.

The culprit is regulation itself. The taxi business is heavily regulated in L.A. The city's Department of Transportation inspects cabs, certifies drivers and regulates fares. For the cab companies, this is added expense they pass along to customers or eat themselves, to the tune of tight margins. At the same time, since the regulations provided high barriers for entry for competing cab operators, none of the existing companies ever felt the need to innovate. Regulation caused burden, but also a measure of protection.

Cab companies saw the dangers ride-sharing presented to their businesses and went to the government for help. In economics, such an approach is called “rent-seeking.” Rather than let market forces and good old-fashioned competition win the field, rent seekers look for a state-sponsored solution. Large multinationals engage in rent-seeking when they push for tariffs on foreign imports. Companies that spend heavily on lobbying are classic rent-seekers since they look to influence policy in their favor.

But the rent-seeking of the cab companies in the City of Angels was the most devilish. Here, companies were looking for the government to put the competition out of business. They were almost successful: The Department of Transportation issued cease-and-desist letters to Lyft, Sidecar and Uber, threatening them with arrest and fines if they continued to operate.

Those threats were never enforced, mostly because the new services were popular with customers (who vote, after all). It helped that new L.A. Mayor Eric Garcetti also backed the new companies.

There was also no way for the cab companies to argue that consumers were being harmed by the upstarts. As the Los Angeles Times put it, “the main danger the companies pose at this point is to cabbies' hold on what used to be a captive market.”

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It's not that Sidecar and the ride-sharing companies don't face government oversight. They are regulated on the state level, and will face more under new regulations from the California Public Utilities Commission, which claimed jurisdiction a few years ago because these companies don't offer rides, but rather serve as a clearinghouse between drivers and passengers.

So cab companies were thwarted in getting their regulatory allies to help settle their competitive scores, so it was refreshing for free-market proponents to see Bell – one of L.A.'s biggest cab companies – decide to try to make technological improvements. Using Flywheel, passengers should be able to summon a cab in five to seven minutes, and, assuming the price is right, that should be competitive with the services from ride-sharing companies.

“There’s not as much of a cab culture in Los Angeles,” Flywheel CEO Steve Humphreys told the L.A. Times. “We think there’s an opportunity to get more people to ride them by being able to just load an app to find them.”

If that's the case, innovating around ride-sharing may beat rent-seeking after all. Bell's decision to use the Flywheel software sends a big message, one increasingly less heard nowadays: Companies like Sidecar and Lyft may be run out of town, but it will be companies like Bell, rather than the strong arm of the government, that does it.