7. Regulation and the Future of Platforms Flashcards
The disruptive impact of platform businesses on traditional industries
It’s natural that companies and workers whose profits and livelihood may be threatened by new business models will fight back by any means available (e.g., bookstores complaining about Amazon)
Externalities: complaints
Complaints about Airbnb e.g., unhappy neighbours due to horror stories about the Airbnb rentals with parties, prostitutes etc. The impacts of Airbnb on third parties uninvolved in the rental arrangement are what economists call externalities
A recurring economic problem is when the cost of negative externalities is borne not by the people or companies that created them but by “innocent bystanders” who are stuck with the problem. Externality issues are great way of a business to antagonise its neighbours and invite intervention by regulators
Some externalities are positive. Some data suggests that hotel prices fell slightly after the entry of Airbnb, likely increasing the tourism business and ultimately benefiting local restaurants and other attractions. But such positive externalities are often difficult to document and quantify, while negative externalities tend to be vivid, unmistakeable, and painful
The case against regulation: Laissez Faire
The vast majority of market failures are best addressed by market mechanics themselves
In their view, the evidence of history suggests that government regulators tend to be incompetent or corrupt, which means that regulation generally fails to solve the problems it is intended to address
In specific instances where the free market fails to resolve a significant problem of market fairness or consumer protection, it can be addressed by private litigation in the courts
The case against regulation: regulatory capture by Stigler
Managers of government agencies charged with devising and enforcing regulations must often turn to business leaders for advice and guidance on how to craft those regulations, which often means that the rules end up benefitting companies rather than the public at large
The basic premise is that market participants will act to influence regulation in their own interests, often making the underlying market problems worse rather than better
The case against regulation: revolving doors
Executives have been known to divide their careers between Washington and the private sector so that the same people who design regulatory regimes later advise corporations on the best way to evade those regimes or manipulate them for profit
It is possible to argue that rather than eliminating regulation, we need to design political, social, and economic systems that reduce the likelihood of regulatory capture – e.g., through laws that restrict the “revolving door”
Strong difference of regulatory capture between countries
When governments are relatively unchecked by their citizens. Strong regulation often leads to high levels of corruption and expropriation by government officials – Widely seen in authoritarian regimes
However, in countries with more accountable governments, higher levels of regulation appear to be relatively free of such corruption, which reduces the level of regulatory capture
Regulatory issues raised by the growth of platform businesses: 7 different ones
- Platform access
- Fair pricing
- Data privacy and security
- National control of information assets
- Tax policy
- Labour regulations
- Potential manipulation of consumers and markets
Regulatory issues (1): Platform access
When certain potential participants are excluded from a platform, it raises questions about who benefits from the exclusion, whether that exclusion is fair, and what its long-term impact on the overall marketplace is likely to be - e.g., Alibaba controlling 80% of ecommerce transactions in China. The threat of exclusion is therefore a serious challenge tp any firm conducting business online
The issue of exclusion is also especially significant when network effects are strong, as business professor Carl Shapiro argues “Such exclusionary contracts and exclusive membership rules can be especially pernicious in network industries, posing a danger that new and improved technologies will be unable to gain the critical mass necessary to truly threaten the current market leader = called excess inertia
Regulatory issue (2): Fair pricing
Predatory pricing – the situation in which a firm prices goods or services so low that it cannot possibly be making money. The low prices temporarily benefit consumers, but in the long run harm them by driving competitors out of business, which permits the remaining supplier to raise prices to monopoly levels
However, firms with strong two-sided network externalities can maximise profit even when they distribute services to one side of the market at a price of zero. They achieve this result by earning attractive profits through sales of the goods or services they provide to the other side of the market (e.g., boys and girls at a club)
Regulatory issue (3): Data privacy and security
The use and abuse of consumer information by the credit agencies and lenders, who rely upon them, are also the subject to fierce debate. . Stories of racial, and geographic discrimination abounded
The sale of underlying personal information about consumers is a significant source of income for many platform businesses. Track consumer’s web usage, financial interactions, magazine subscriptions, political and charitable contributions and much more to create highly detailed individual profiles. Data (also sensitive data) can be purchased through data broker firms such as Acxiom.
Although, these platforms have privacy policies that are available to consumers, they are written in dense legalese that very few users bother to read. Ownership rights of one’s own data would give victims legal course of action after data breaches occur. However, few care about their data
Regulatory issue (4): National control of information assets
When multinational firms expand into less developed countries they are usually required to follow so-called local content regulations, which are designed to stimulate the local economy and to ensure that a portion of the economic growth created by the new venture remains in the host country rather than being transferred to the headquarters
It might extend to data services – requiring for example that business data be stored and processed locally rather than internationally
Privacy laws in Europe represent another form of what might be called data nationalism to protect users. However, the result is a hodgepodge of local data processing centers and a fragmentation of data that, if aggregated, could be used for commercial purpose
Regulatory issue (5) Tax policy and regulation
Who benefits from the sales tax dollars generated?
In some states, Amazon claims not to maintain a “legal presence” sufficient to require payment of sales tax despite operating large warehouses and shipping centers in those states.
International reach of online platforms renders traditional local and state sales tax regimes obsolete, and that a national sales tax law would be a natural and logical solution.
Since Amazon now collects sales tax on most of the goods it sells, the company stands to gain from a simplified sales tax system that will apply equally to all internet merchants – including the many smaller rivals of Amazon, who currently skate by collecting little or no tax on most of their sales
Regulatory issue (6) Labour regulations
E.g., with the case that the people who sign up for work through firms such as Uber, TaskRabbit, and Mechanical Turk, are truly independent contractors, and the platform bears little legal (or moral) responsibility to the parties on either side of the interaction once the match has been made
In the long run, public disapproval of business behaviour can have a meaningful impact on the value of a company’s brand – which means that the court of public opinion operates at times as an unofficial regulatory body that business leaders are wise to heed - e.g., with the case of Internet Sweatshops
Similarly, there are limits to the extent to which labour platforms will be able to evade responsibility for their practices in hiring, screening, training, and supervising workers - Uber, for example, has experienced significant criticism for alleged sexual assaults committed by its drivers on passengers
Multihoming of freelancers, makes it all the more complex for government agencies to accurately capture labour and unemployment data
Regulatory issue (7) Potential manipulation of consumers and markets
The retail platform, Amazon, controls such a large share of the online book market that even giant publishers feel pressured to accept business terms they’d otherwise consider unacceptable
Through Facebook, 700,000 members had been deliberately manipulated as a part of a psychological experiment + political manipulation by tampering start pages (influencing voter turnout for example)
Traditional regulation vs. regulation 2.0
Traditionally, it was difficult or impossible for a consumer to gather accurate information about the quality or safety of a particular taxi driver or a hotel – which is why most governments have taken steps to screen and certify taxi drivers
But in a world of abundant information, regulation based on data-driven accountability makes more sense: Firms like Uber and Airbnb can be granted freedom to operate in exchange for access to their data
Because it is possible to know exactly who did what to whom and when, consumers and regulators can hold people and platforms accountable for their behaviours after the fact. (e.g., ratings etc.) - Rather than establishing rules of market access, their primary job would be to establish and enforce requirements for after-the-fact transparency
However, most people would have government to e.g., regulate and inspect food processing etc. (in matters of life and death, traditional wins) Hence, a mix is preferred
