Sharing Economy Must Come Inside Regulatory Tent

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Lambert here: It’s not “sharing.” It’s renting. The focus and language are Australian, but the issues raised cross borders.

By Stephen King, Professor, Department of Economics at Monash University. Via Macrobusiness.

New internet businesses are transforming dusty old industries. The current wave includes Uber (hire cars), Airbnb (accommodation) and Freelancer (labour services).

But there have been plenty of others over the past twenty years. Email has bankrupted postal services. Skype put a rocket under telephone companies. Google has transformed information and advertising.

There will be plenty more in the near future.

How do the new wave of internet businesses fit into regulatory structures that were designed for a bricks-and-mortar world?


The Productivity Commission is currently investigating the barriers facing new businesses. It is taking particular interest in digital start-ups. However, the problems go much deeper.

There are three regulatory challenges for Australia when dealing with internet businesses in the sharing economy:

  1. How do we protect consumer interests?
  2. How do we avoid vested interests using regulation to stop entry and competition?
  3. How do we prepare for future competition issues?

Consumer protection

Your Uber car is involved in an accident. The driver has standard insurance, not commercial insurance. So any property loss is not covered.

You rent an Airbnb apartment only to find out that the apartment has been sublet in violation of the lease. You are evicted.

You lease out your apartment on Airbnb. A few days later the police call. The apartment has just been raided. The tenants were using it as a pop-up brothel.

Commercial arrangements can go wrong for any business. Internet businesses are neither more nor less likely to raise problems. However, from the consumers’ perspective, these businesses operate outside normal guidelines because they claim to be matching platforms, not direct service providers.

Uber doesn’t employ its drivers. It checks them and uses a ratings system to maintain standards, but it would claim that it is not formally liable for poor driver conduct. Similarly, Airbnb states that local laws are the local service provider’s problem.

Is this legal and is it good enough?

The Courts will check the legality. But relevant precedent is probably years away. Further, Court decisions may be inconsistent between jurisdictions. In Australia, the High Court ruled that Google is simply a publisher and not liable for third-party advertising content. However, the European ‘right to be forgotten’ laws make Google liable for third party web-pages that can be accessed through its search engine.

The platforms may ask us to trust them. After all, their reputation depends on the quality of the services provided through their platforms. But this is not good enough. Relying on the market and reputation to sort out consumer protection issues can lead to lots of damage on the way. And despite the best efforts of a platform, bad operators will get onto the system.

Light-handed accreditation regulation will also be imperfect, but it can help the internet platforms work better for consumers.

So Uber drivers may need to be accredited, to ensure they have safe cars and appropriate insurance. Tripadvisor reviews will need to be presented with appropriate caveats. Airbnb apartments should not be advertised in a way that is misleading and deceptive. And the platforms cannot simply shrug their shoulders and say, “not our problem”. The platform will have some responsibility to check that their suppliers meet appropriate legal standards.

The platforms themselves should recognise this, which perhaps explains Uber’s recent change of heart. The alternative is either to operate outside the law and be sued to death, or to watch a new regulatory bureaucracy grow around their business. Cooperation and compliance, death by lawsuit or strangulation by red tape. They are the options facing the internet businesses.

Vested interest regulation.

No business likes competition. Existing bricks and mortar businesses will not simply yield to more efficient internet-based businesses. They will put up a fight and part of the fight will be to try and use regulation to strangle the new businesses.

Of course, incumbents will not put it that way. The official line will be about protecting consumers. So when taxi license owners protest against Uber or hotel chains complain about Airbnb, the language is about consumer interest, not profit protection.

But it is competition that delivers value for consumers. Governments need to separate out self-interested claims by incumbents from real consumer concerns.

This is not easy. Vested interests will blow out of proportion any incident involving the internet entrant while ignoring similar incidents that have occurred through their own service.

Governments need to have the courage and insight to recognise incumbent rent seeking and to hold out against it. That can be difficult. The bricks-and-mortar businesses fighting against the entrants may be large (think Harvey Norman and the internet tax debate), and will have a lot at stake.

But as Andrew Leigh has noted:

[F]orward-thinking regulators are increasingly realising that the sharing economy can deliver big benefits for consumers. … the benefits are real and the risks are manageable.

Competition Rules

In technology, today’s small entrants are tomorrow’s dominant firms. Shareholders in Uber, Airbnb, Tripadvisor, Freelancer, and so on are investing their money in the hope of a profit. And if they succeed by helping consumers, then that is fantastic. However, as these businesses grow, they may be tempted to make easy money through market power rather than competition.

For example, Uber currently does not require that drivers are exclusive. As David Plouffe of Uber noted at a recent Grattan Institute event, a driver can drive for Uber, Lyft, or anyone else. But will these rules continue to hold if Uber (or someone else) grows to dominate the ride sharing market?

These concerns are not hypothetical. We have seen large businesses use various tactics, including exclusivity arrangements, to make new entry hard. In supermarkets, Aldi had a hard time expanding in Australia due to exclusivity arrangements between the major chains and the shopping centres. These were eliminated after the ACCC’s 2008 grocery inquiry. Since then, Aldi has rapidly expanded.

Internet based businesses that grow dominant may try similar tactics.

This means that competition regulators will need to be watchful. In particular, the terms and conditions used in contracts between platforms and both suppliers and buyers need careful scrutiny. If they involve exclusivity arrangements or ‘reference competitors’ say through ‘most favoured customer’ pricing, then the alarm bells should start ringing.

Two caveats.

First, these concerns hold for all large businesses, not just those on the internet.

Second, in fast changing areas of technology, attempts by incumbents to hold out entry are often doomed to failure. As historic antitrust cases against IBM and Microsoft in the US illustrate, the market will often act faster than regulators and the courts.

Bring internet businesses inside the regulatory tent

New businesses built on internet-based technologies have, are and will continue to transform many industries. The result is better services at cheaper prices for all Australians.

But these businesses cannot and do not live in a regulatory vacuum. They cannot grow as regulatory cowboys. But, vested interests will be more than happy to strangle them with red tape. Getting the balance right will be difficult for both government and regulators. But if we get it right, the potential gains are huge.

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This entry was posted in Free markets and their discontents, Regulations and regulators, Risk and risk management, Social policy on by .

About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Doug

    There are at least two additional questions not asked here:

    How do we ensure workers have decent compensation and other protections/supports required for dignified lives?
    How do we ensure that these emergent markets sit within not beyond society? That is, how do we avoid the cancer of ‘free markets’?

    Each of these demand a key linguistic correction: These services are not — NOT — a ‘sharing’ economy. They are a ‘gig’ economy and, as currently operated, they exclusively trade on consumer convenience and severe income inequality (and desperation) to create rapid, exploitative capital returns in the Great Casino.

    A ‘Sharing’ economy would be one subsumed under society — not replacing that society. Indeed, the very word ‘sharing’ is social, not economic. If Uber were a sharing enterprise, folks would drive other folks for free.

    That drivers now perform this service for less than anything remotely resembling a dignified economic contract meeting Maslow’s most basic tier of needs reveals that ‘sharing’ is used in typical free market ways as the cuddly cover for exploitation.

    As well meaning as the author of this post might be, he’s sleepwalking under the influence of culturally induced ignorance (aka ‘agnotology’).

    And, oh by the way, when he asks, “How do we avoid vested interests using regulation to stop entry and competition?” … a fair question… let’s be sure to also ask, “How do we avoid vested interests such as cognitively and otherwise captured vested interests from using deregulation to destroy those who labor?”

    1. diptherio

      I was also disappointed to see that the author completely neglected any consideration of labor conditions for the service providers on these platforms. That’s a pretty major oversight given how much the suckiness of driving for Uber has been in the press lately, and a quite telling one. Who are we concerned about? Consumers–people who buy things–people with money to spend. Who don’t we even think about? The workers–the ones who provide everything we want and need–those who need money. Pretty telling….

      As for the lingo: I agree that Sharing Economy is quite the misnomer. VCs tend to forget that words often have pre-existing meanings. If you’re curious what a REAL Sharing Economy might look like, check this out:

      Nijmegen Sharing City Embraces No-Money Abundance

      1. Integer Owl

        I can’t see myself using any of these services of my own accord, I don’t even use a smart phone, however I have had the dubious pleasure of getting a ride in an Uber taxi called by a friend after we left a party. It was a nice car, not 100% sure but I think it was a Mercedes, quite new. Not knowing my friend had summoned it using his tracking-device, I was still on hold to the local taxi service when it arrived.

        As I am prone to do, I started chatting with the driver and tried to extract some info on how the Uber system works in Australia, leading up to what his feelings were on the working conditions and pay. Having read about the bad conditions in the US I was not expecting the answer he gave, which was essentially that he liked the job and the pay was reasonable. Maybe there were microphones in the car and he didn’t want to say anything that his bosses wouldn’t like, or maybe there are different conditions and pay rates in Australia, I’m not sure.

        In any case, just one piece of anecdotal evidence, however we do tend to be a bit behind here in the merciless march of brutal capitalism so maybe the author is a little bit less wrong than contended in not covering the labour conditions angle, in the context of Australia. Just a thought.

        1. reslez

          Hopefully your Uber driver was being truthful with you, but you can’t count on it. The drivers are very dependent on receiving positive reviews so they will reinforce Uber’s relentlessly upbeat messaging in order to give you warm fuzzies about your ride. If drivers get negative reviews they can be expelled from the service.

    2. lyman alpha blob

      “…if we get it right, the potential gains are huge.” He neglects to mention for whom. I haven’t met too many cabbies who retired early to live off that great big nut they had saved away…

  2. Carla

    Re: Lambert’s note: “It’s not ‘sharing.’ It’s renting.”

    You can say that again, and again, and again. And I certainly hope we will!

    1. diptherio

      I think we need to make the distinction between the real Sharing Economy, which is actually a thing in its own right, and the Rental or Gig Economy (see the link above or this one from closer to home). One advantage of Uber and AirBnb being mislabeled as “sharing” is that we get the opportunity to correct people and point them towards the real thing instead.

      Here’s one of my current favorite ideas from the real Sharing Economy, straight from dear ol’ Mom:

      Poker Chips and Friendships: The Babysitting Co-op

      While currency, of a sort, was used by the co-op, it was only as an easy accounting mechanism, to keep track of people’s sharing and eliminate the ability to free-ride. Also note that new members got “helicopter dropped” a certain amount of this “money” for nothing when they joined, which makes this a type of DIY MMT, in my mind. I see no reason why this model could not be easily expanded to other services that neighbors can provide for eachother.

      One other great example of real sharing is right there in Detroit, the Fireweed Community.

      1. washunate

        Yeah, I think this discussion is really important. The author isn’t describing sharing, which is something that happens within a social group where the social group itself is the mechanism that enforces the agreement. Trust itself is the currency being exchanged when items are shared.

        Instead the author is talking about arms-length transactions where the buyer and seller really don’t know each other or even know the same people that know each other and so they are exchanging government issued currency units as a proxy for trust*. That is a commercial relationship where things like accidents, criminal usage of your leased property, and disputes over charges and payment and privacy and so forth are quite naturally part of the calculation, the risk, of engaging in such activity. We call these transaction costs, and in many cases, especially single use or large items, these costs are potentially enormous. Especially where information asymmetries come into play as people like Akerlof and Stiglitz have explored.

        So I don’t really know what the author is worried about here? As disputes arise over time, they will be settled through the legal system like any other commercial disputes. None of that is relevant to whether you carpool to work with a neighbor or share your bike with a friend or do a babysitting exchange with another couple who has young children or have a lending library at your local park or mow your neighbor’s lawn in exchange for a nice Sunday dinner. This is the sharing economy, not Uber and AirBnB:

        And so I heartily agree with both of you that this is a great opportunity to correct the language of academics. Stop talking about corporate projects as sharing. Call it what it is – renting*.

        *Which, by the way, is also a very valuable part of market-based economics. The point is simply that renting in the formal economy and sharing in the informal economy are two different activities.

  3. sd

    Friends provide these services (Uber, Airbnb, etc) for one simple reason, they really need the income. If they didn’t need the income, they wouldn’t be driving, renting, etc. The job situation out there is still crappy.

    So under the circumstances, it’s a bit difficult to talk about regulations in today’s environment when large multinational corporations simply ignore them with abandon while so many people continue to struggle to keep a roof over their head. So while I know the author has a valid point, the elephant in the room is the completely shitty job prospects that have lead to the necessary creation of a sharing economy.

    1. diptherio

      This is why we need better, community-owned, platforms. There’s been a lot of chatter in the tech co-op world lately about doing this. I think Loomio, for instance, has provided a viable (and superior) alternative to the google groups that we all seem to use for our organizing. But that’s only the thin end of the wedge: taking down Uber is the holy grail. I think a vector of attack might be to offer municipalities community-owned and managed platforms that they could authorize and realize some income out of, while maintaining local control and giving drivers a superior alternative. Check this out if that sort of thing sounds interesting to you:

      Cooperatives’ Uber Moment

    2. reslez

      It’s less a “sharing” economy and more a “misery” economy. Even if it really were about liberating the underemployed to make money via the power of the almighty cell phone, why does there need to be a slimy wannabe-billionaire sitting atop the pyramid? Why the need for a hefty percentage taken from every transaction?

      These platforms need to be demolished in favor of co-ops run by the people who operate them.

  4. Jef

    I think our focus should not be on the causes of cancer nor the cancer itself but instead we need to focus in on all the multilayers of all of the symptoms and effects of cancer and gently steer them in a direction that is slightly less detrimental to the host organism. This has the added benefit of allowing society to further financialize cancer, expanding causation, and therefor increasing the overall GDP of the economy.

  5. Kevin Carhart

    To spin off a question from a sentence in the original article, there isn’t literally a “death by lawsuit,” is there?

    Because honestly, how many complaints are there against Uber now? It seems to me that there is almost no limit to how many complaints, class actions, and reports of rape and assault could flow like water off a VC’s back. Otherwise shouldn’t it be making some kind of difference by now? I would like it to matter, and I’m discouraged. You read in one breath about the latest alleged assault, and you read in the next breath about how they just closed Round Q. In what way does a class action matter to a VC? Would they care because having to pay a settlement reduces the amount available as profit? My perception is that they are infinitely blase, and simply spend money on a legal department, which is probably something they were expecting to have to do eventually.

    What are the effective vectors of attack (thanks diptherio for putting it this way) against private companies with VC money, for whom we do not have the benefit of SEC filings? I am grateful to Richard Smith for his stories that, among their other pleasures, point you towards the means of detective work like and the various corporation registries as a place to get some cold facts. Can we get smarter earlier about VC as an ongoing engine that turns these radical pilot projects out every year, rather than just fighting the project? I’m sure they can anoint more little Kalanicks and Busques to be their point person. Hating them doesn’t get to the root cause. What are the vectors of attack against the VC firms themselves, if there are any? (The Naked Capitalism document trove of PE agreements comes to mind. Would this ever matter to them practically? Are leaks a useful vector of attack against private capital?)

  6. c1ue

    Pretty weak article for a supposed intellectual.
    For one thing, no mention was made concerning the effects of the sharing economy on sectors outside the service space.
    For Uber – the addition of thousands of cars circling roads in any given city has a large impact on traffic. A very simple thought process reveals that Uber usage actually increases the miles driven per trip – as the Uber driver must go to the customer – with the only potential benefit being less cars parked.
    The taxi medallion system was not originally created to enshrine taxi medallion owners – it was created because there were so many taxis in LaGuardia’s time that a cab driver was synonymous with thief and rapist.
    Equally the institutionalized lying by Uber drivers using personal auto insurance while commercially driving – how is this a good thing?

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