Regulation shouldn’t be used to make new business platforms fit the rules crafted for older regimes. That was the consensus of policy experts, bureaucrats, economists and industry representatives who took part in a June 9 Federal Trade Commission conference on the emerging “sharing” economy.
Speakers didn’t doubt that regulation should play in protecting consumer safety and experience, but several insisted regulation should do only that, while deregulation of existing industries should make the marketplace more competitive.
The introduction of new, Internet-based technologies into many sectors of the economy arguably has reduced the need for regulator interference on several fronts. Consequently, the FTC and other regulators are now beginning to make the tough admission that their power is not as necessary any more. Reputation, review systems and reactive platforms already regulate the marketplace for shared goods in ways that no government could do.
Uber allows riders to rate their drivers on a 1-5 star scale after they reach their destination. Uber then regulates who is allowed to drive and if any driver’s average score falls below 4.7 they are not allowed on the platform any more. It is not erroneous to claim that the average score for traditional taxi drivers likely would not be above a 4.7, if there were a way to collect that data.
Airbnb uses an extensive review system in which both lenders and borrowers of space review each other after each stay (70 percent of stays are reviewed). In the hotel industry, by contrast, only 1 percent of stays are reviewed, and they are never done from the supply side.
Both businesses quickly react to consumer complaints on either side of the market with “platform guarantees,” often offering settlements for coffee spilled on a couch or for a rider who experienced malicious driving. Where regulation may be needed–and where it already emerging in many states–is on the labor, insurance and customer privacy fronts. These issues differ from the asymmetric information and transaction-cost problems, which technological innovation has worked to solve.
Trust and consumer confidence are the largest products that online peer-to-peer platforms offer. There are therefore already strong incentives to protect market participants. Platforms like Uber and Airbnb are designed to match independent buyers and sellers. Profits are taken from reducing transaction costs and solving a large portion of the asymmetric information problem. As long as the platforms do not enter one side of the market (i.e., providing or buying services), tough regulations are not necessary.
Antitrust regulation is another area the FTC may consider, but it needs to move slowly and deliberately before taking action. Some early forecasters, especially those representing the interests of current industries, predict that certain peer-to-peer platforms will gain monopoly power. However, platforms become larger and gaining market share through network effects is not necessarily a bad thing. In fact, their growth actually encourages more competition. When any market expands to a new city or neighborhood, that growth is accompanied both by increased supply and increased demand. Antitrust suits that splinter these markets would hurt consumers.
Policy should move to accommodate sharing-economy platforms and other similar innovations, not to lock in already entrenched firms and business models. Taxi commissions should repeal overly restrictive metering rules, eliminate medallions and permit innovation. In the hotel industry, taxes should hew closer to regular sales tax rates and inspections should only examine services and products hotels do not already have an incentive to regulate themselves.
Current law does not prohibit existing firms from adopting the technology=based protections that newcomers have developed. In fact, doing so likely would boost the customer experience. Taxis, hotels and any other industry “threatened” by the sharing economy have incentive to protect consumers, without Big Brother doing it for them.
The brilliance of the sharing economy is that it transforms industries that once required high volumes of physical capital to start and operate to become much less dependent on fixed costs. Instead, they are almost completely dependent on variable costs. Burdensome regulation which does not directly protect consumer safety will reverse that trend, raising fixed costs for emerging platforms.
The Federal Trade Commission, state legislators and local officials need to prod slowly to avoid regulatory capture by rent seekers who hope to slow down the emergence of the sharing economy.