Why Uber is having a hard time in Korea

Uber, the world’s leading car-sharing platform, has not been successful in establishing a foothold in South Korea since it began the attempt in 2013. Ss elsewhere in the world where Uber has entered, taxi drivers have been resistant, and Uber Korea has been unable to withstand the backlash. In addition, because of legislation and taxi-industry regulations, it only offers limited services.

The relevant policy question here is whether the Korean government should keep barring Uber from making inroads in the country, considering the benefits that Uber could bring to consumers.

What happened in the US

The taxi industry and taxi drivers would naturally be the biggest losers if Uber were allowed to be fully operational. If a full car-sharing system were introduced, anyone registered with Uber would be able to become a de facto driver for a set fee, meaning the price of a public good, taxi service, would inevitably decline.

According to The New York Times, the average price of an individual New York City taxi medallion fell to US$872,000 in October 2014, down 17% from a peak reached in the spring of 2013. In other big cities, medallion prices are also falling, often in conjunction with a sharp decline in sales volume. From its peak in 2014, the price of an individual taxi medallion in New York City more than halved from $1 million to $500,000 or less in 2017.

Cost

As many taxi drivers would lose their jobs, retraining and unemployment benefits would have to be partially covered by the social-welfare safety net funded by taxes. Roughly 250,000 operating taxi drivers would gradually lose their jobs in South Korea. But the costs are not limited to the taxi industry. Introduction of car-sharing technology and related industry requires careful examination of the legislation governing the insurance and automobile industries, and thus entails negotiation and legal restructuring costs as well.

Benefit

The biggest benefactors would be the consumers of transportation services. In the taxi market, asymmetry of information is pervasive because passengers do not have sufficient knowledge about taxi drivers when they choose one. For example, some unscrupulous drivers sometimes take advantage of their customers’ lack of information by driving longer distances than necessary so as to overcharge.

Such problems are mostly eliminated with car sharing because every Uber driver is registered and obliged to provide records of past performance, and Uber would recalibrate driving distances to see if there was actually an excessive charge. Furthermore, every registered driver has an incentive to provide the best services because their performance gets feedback from their passengers through Uber and their commissions largely depend on it. In contrast, taxi drivers have less incentive to do so because they do not have track records of past services and their pay is not correlated with passengers’ satisfaction.

In short, car-sharing companies act as an intermediary that eliminates asymmetry of information between drivers and passengers, just as banks eliminate risks between lenders and borrowers who do not know each other. As a result, the entire driving system becomes more transparent and efficient. Additionally, new job opportunities are created in a new sharing industry, offsetting some of the taxi drivers’ job losses.

Last, Korean sharing companies and tech start-up companies will lose valuable opportunities to accumulate data and improve their service if they are not allowed to enter the sharing-economy market. High-tech companies need to accumulate customer data and experiment with them to improve their service. Uber has been operational since it was founded in March 2009, and its competitors like Lyft have constantly innovated and improved their service using their data. In contrast, virtually no Korean company has pioneered in this sharing economy because of strict regulations, and the gap between the leading companies and slow starters is getting wider every passing day.

Current status

South Korea’s most famous messenger service, Kakao, has made the Kakao Taxi service available to passengers since 2015. It is similar to Uber in that it lets passengers get connected with a taxi through its app, but is dissimilar in that only taxi drivers are allowed to operate within the service. Its Kakao carpool app stopped its service after two taxi drivers set fire to themselves and it was met with fierce opposition. Likewise, most carpooling services, such as Plus Carpool, are still in their infancy because of the numerous restrictions.

In addition, after a long, costly and conflict-ridden negotiation that involved the two taxi drivers who immolated themselves and strikes by thousands of taxi drivers, related parties decided that ride-sharing services would only be allowed during the commuting rush hours from 7am to 9am and 6pm to 8pm during weekdays. However, legalization of this agreement has not taken place yet as taxi driver still demand total prohibition of ride-sharing services.

Policy recommendation

The cost-benefit analysis indicates that the costs are disproportionately concentrated in the taxi industry, while the benefits are largely spread over an entire body of passengers. Such skewed benefits and costs, by nature, make it hard for politicians to take action because cost-bearing parties would strongly resist any change while benefactors are mostly indifferent to small intangible gains.

In the short run, therefore, it is politically unpopular and difficult to allow Uber and other ride-sharing companies to operate in South Korea. However, the government should allow Uber gradually to increase operations along with carefully planned job-retraining programs and assistance for taxi drivers, because society as a whole has more to gain from new technology and industry in the long run.

This article originally appeared at Joon’s Blog.