Amazon.com, Inc. (NASDAQ:AMZN) is testing taxis to deliver packages to customers in San Francisco and Los Angeles, according to report from Wall Street Journal based on information obtained from people familiar with the situation.

Amazon Testing Taxis to Deliver Packages in California

Amazon.com uses Flywheel

According to the sources, Amazon.com, Inc. (NASDAQ;AMZN) is using Flywheel, a taxi-hailing mobile app in its experiment to deliver packages via licensed cabs.

The e-commerce giant is sending for taxis to mini distribution centers thorough the mobile app. The taxis load as many as 10 packages for delivery to a single location or zip code. Amazon.com, Inc. (NASDAQ:AMZN) is paying $5 per package delivery within an hour, according to the sources.

The test is part initiative in looking for ways to expedite the delivery of packages to customers and strengthen its competitiveness while reducing costs. The e-commerce giant’s shipping costs as a percent of sales have been increasing annually. Last year, its shipping cost increased to 8.9% from7.2% in 2009.

Amazon.com, Inc. (NASDAQ:AMZN) is trying taxis as alternative to the United States Postal Service (USPS), FedEx Corporation (NYSE:FDX) and United Parcel Service, Inc. (NYSE:UPS).

The-commerce giant experienced shipping delays last Christmas, which prompted it to test its delivery service. Amazon.com, Inc. (NASDAQ:AMZN) also increased the use of regional couriers and partnered with USPS to deliver fresh groceries. The company is also testing drone delivery.

Amazon.com may be developing same-day delivery algorithm

According to Sucharita Mulpura, an analyst at Forrester Research, it is possible that Amazon.com, Inc. (NASDAQ:AMZN) is currently developing a “same-day delivery algorithm” to evaluate different delivery services and determine which one is the cheapest and fastest.

Mulpura added that a same-day delivery is still a niche service for customers. She said, “The reality is, people generally aren’t willing to pay enough for the service to make it worthwhile for these companies.”

On the other hand, Greg Bettinelli, a partner at Upfront Ventures commented that the e-commerce giant transformed the market for faster delivery. He said, “If you’re a retailer, you’ve got to do something to compete against that, but that also means Amazon can’t stand still, they’ve got to keep innovating.”

Its competitors in the retail industry improved their competitiveness by offering same-day delivery, one-hour delivery and in-store pick-up of products ordered online. Target Corporation (NYSE:TGT) recently offered free shipping on all orders starting October 22 to December 20.