New firms that use mobile apps to connect passengers with drivers of vehicles for hire and ride-sharing services have been the target of protests by taxi drivers and owners across European and American  cities, most recently Cambridge, underscoring how digital technology is disrupting a regulated industry .

The protests are a study in what happens when well-established incumbents who are protected by regulators seek to maintain a cushy status quo rather than leverage technology to improve customer service.

The cabbies’ cup runneth over with rage because they claim the apps create an unfair advantage and the new market entrants fail to conform to regulatory and licensing requirements. Companies like Uber argue that they are introducing competition and offering customers the luxury of choice and superior service. The technology they use has the potential to transform transportation the way Amazon has changed the retail shopping experience.

As the economist Joseph Schumpeter noted, capitalism is the “perennial gale of creative destruction.” What is occurring in the taxicab industry has been repeated in one industry after another; none are safe from innovative technologies.

The taxicab business model has serious customer-service deficiencies. Too many passengers find cabs unavailable, poorly maintained and aggressively driven, all of which makes for an unpleasant experience. All this is occurring under the umbrella of officially sanctioned taxicab companies with near-monopoly power.

The industry structure in major American cities revolves around the issuance of a fixed number of medallions, operating licenses which are freely tradable so the right to operate a taxi is divorced from the actual work of driving one. The happy few medallion holders make their money by leasing cabs to drivers – independent contractors who receive no benefits. The restricted supply translates into high medallion prices; in Boston the current price is about $625,000. The system is a classic example of government regulation that creates wealth for a happy few at the expense of society as a whole.

The taxicab industry is an easy target for entrants using the latest digital technology, and they are  making a meal of it. Mobile communications technology facilitates a wide range of business concepts to address opportunities posed by a flawed industry model and an increasing number of city dwellers who choose not to own cars.

Uber was launched in 2010 in San Francisco. It lets customers use an app to call for a car with a few taps on their smartphones. The car arrives within a few minutes. The fare, including gratuity, is charged directly to the customer’s credit card, so no cash changes hands, enhancing safety for both passenger and driver. An email receipt is sent to the customer when the trip is completed.

Uber does not own its cars but relies on a network of established, licensed drivers who apply to be part of its network. In this sense, Uber is not in the taxi business but serves as a referral or dispatch system. It uses sophisticated data analysis to determine where drivers should wait so they can respond quickly to service requests.

Drivers and passengers rate each other. During peak demand periods, fees increase. Drivers get 80 percent of the total fare and the balance goes to Uber.

The firm uses technology to provide superior customer service in a mature industry that offers an undifferentiated product. Uber has entered a locally regulated market that has evolved over a long time to protect established interests.

Taxicab regulators are not elected and work closely with existing companies, to whose interests they are highly sensitive. The result is regulation that is designed to improve conditions for the regulated, not promote the public interest. As the Boston Globe Spotlight Team uncovered in April 2013, the taxicab industry mainly enriches the holders of government-issued medallions while drivers earn subsistence wages and passengers pay some of the nation’s highest fares.

Despite all the talk about the virtues of competition, businesses seek to move away from competition and toward monopoly. Instead of adapting to new technologies , the taxicab industry looks to government, like the cavalry in a John Wayne western, to ride to the rescue and protect the status quo.

originally published: June 21, 2014