FTC Issues Report On Sharing Economy

Recent technological advances have allowed the rapid and widespread adoption of platforms that facilitate commercial transactions among decentralized “peers.” Platforms like Uber, Lyft and Airbnb have existed for fewer than 10 years, yet by 2015 15% of American adults had used an online ride-hailing “app” and 11% had used an online home sharing service. Uber reported that it was providing more than one million rides per day by the end of 2014, and Airbnb reported a cumulative total of over 60 million guests renting its listings by the end of 2015. The emergence of these Internet-based “sharing economy” business models has increased interest in the economic and regulatory issues presented by peer-based platforms. The Federal Trade Commission (FTC) recently released a staff report, “The ‘Sharing’ Economy: Issues Facing Platforms, Participants and Regulators,” examining these issues.

Peer-based platforms create marketplaces that allow individuals to buy and sell services. The platforms, which are typically accessed through an Internet-capable device, provide a method to efficiently match buyers and sellers. Individual suppliers on these platforms frequently use their personal assets, for example a car or residence, to provide services. This practice greatly reduces suppliers’ fixed costs and facilitates entry into markets, such as for-hire transport and short-term lodging. Peer-based platform suppliers’ costs of entry and operation may frequently be lower than those faced by traditional incumbents, like taxicabs and bed and breakfasts, with which they compete to some degree. This disparity can be due both to peer-based platform suppliers’ lower fixed costs and their ability to avoid some of the regulatory requirements imposed on traditional incumbents.

The FTC report discusses numerous issues related to regulation of peer-based platforms, including whether and how regulation of these new business models should differ from existing regulation, the extent and possible role of peer-based platforms’ self-regulation mechanisms, data privacy concerns, and the costs and benefits of providing platform-based data to governments.

The type and extent of regulation imposed on peer-based platforms can affect entry, innovation, and suppliers’ competitive advantage in the markets where those platforms operate. Overly burdensome regulation could restrict peer-based platforms’ entry and innovation, thus reducing competition and the benefits of innovation conferred upon consumers. Conversely, failing to apply existing regulations to peer-based platforms and suppliers—particularly if they supply the same services as traditional incumbents—could undermine the existing regulations and their goals, or give one group of suppliers a competitive advantage that it did not gain from superior skill, business insight, or forethought. For example, cab companies have criticized Uber and Lyft, arguing that drivers using these platforms have an unfair advantage because they can avoid regulations imposed on cab drivers.

To the extent, however, that peer-based platforms do not provide the same services, provide them differently, or do not present the same safety risks as traditional suppliers, there may be reasons for differential regulatory treatment. The FTC has suggested in advocacy letters that policymakers should design regulations of peer-based platforms that are no more restrictive than necessary to solve a particular problem. Some observers, noting the rapidly evolving and “disruptive” nature of peer-based platforms, call for a flexible approach that would allow regulations to adapt to new and currently unforeseen situations.

Platforms, like eBay, Uber, and Airbnb, have developed reputation rating systems where service providers and consumers rate each other at the end of a transaction. Some suggest that peer-based platforms’ self-regulation, which primarily includes such ratings systems, can substitute for government regulation. For example, self-regulating through ratings systems can improve the sanitation, cleanliness, safety, or other qualities of the services being provided. Airbnb’s practice of fostering communication between hosts and renters prior to the rental transaction can reduce fraud. Evidence suggests that reputation mechanisms, although imperfect, benefit consumers by reducing asymmetries in information (when the seller knows more about the product or service being provided than does the purchaser). Nevertheless, peer-based platforms’ self-regulation and ratings systems may not be well suited to address certain types of market failures, particularly costs like traffic congestion or renters’ excessive noise that are largely imposed on third parties.

Peer-based platforms’ rating systems allow users to have some measure of trust in the individual on the other side of their transaction. That trust may be strengthened when the rating systems are combined with additional platform functions, including guarantees, background checks, and dispute resolution mechanisms. By allowing users to rate and review the quality of the goods and services offered on the platform, as well as participants’ performance, buyers and sellers build reputations that can influence users’ future purchasing behavior. Besides reducing asymmetric information, reputation rating systems may help identify particularly bad participants, like the Uber driver who may get lost or the Airbnb renter who may trash an apartment.

Platforms collect and maintain large amounts of data relating to users and transactions, including personal and payment information, locations, reviews and ratings, and customer preferences. The platforms’ success and efficient operation frequently rely on this copious information, which makes trust mechanisms between buyers and sellers effective. However, such large amounts of personal data naturally give rise to concerns about privacy and data security, which must be balanced against benefits to the platform and its users. The FTC report suggests that platforms’ clear delineation of what information will and will not be private can help consumers make informed decisions and mitigate privacy concerns.

The FTC report also discusses requiring platforms to share data with local governments to help design effective regulations. For example, one criticism of platforms such as Uber, Lyft and Airbnb is that many service providers are not just people making their car or home available when they are not using it, but rather individuals or other entities whose extensive activity on these platforms strongly resembles traditional commercial activity. For example, some users of Airbnb apparently make multiple properties and entire units generally available on the platform, suggesting that they may not be renting out their primary residences. Data sharing could illuminate the extent to which suppliers on these platforms appear to treat their involvement as a primarily personal or commercial endeavor, whether there may be reasons to regulate suppliers differently based on the extent to which they provide service, and whether there may be reasons to regulate peer-based platform suppliers differently from traditional suppliers in these markets. Should more data become available to governments and to the public, economic analysis can help determine answers to some of the questions that may influence future regulations in the markets where peer-based platforms operate.

Erica E. Greulich is an empirical microeconomist who specializes in assessing liability and damages in antitrust, employment, and class action matters.