Today’s Solutions, Tomorrow’s Problems

Originally published in Cato Unbound

The sharing economy of today must be allowed to compete with and challenge the business models of the past. And – just as important – tomorrow’s innovators must be able to challenge today’s upstarts, who will soon enough be the incumbents.

In his lead essay, Matthew Feeney provides a full-throated defense against the rush to regulate the new, innovative companies making up the “sharing economy.” Many will find his arguments both familiar and welcome, while others will find it unfair to competitors and potentially unsafe for consumers. This divide is ultimately the central feature of most policy debates surrounding the rapid rise of the sharing economy, and the growth of firms like Uber, Lyft, and Airbnb.

Though many aspects of this debate merit greater discussion, I want to limit my comments to ridesharing and the designation of “Transportation Network Companies.”

Some states – including Colorado, California, and (most recently) Virginia – seem to have struck a balance between the two sides of the debate. These states legalized ridesharing services under the designation of “Transportation Network Companies” (TNCs), while also creating specific regulatory requirements in the name of protecting consumers. Feeney is warranted in his skepticism of these attempts, as well as in his belief that these new laws will create opportunities for rent-seeking and regulatory capture in the future.

However, I would take his apprehension one step further and argue that Feeney’s fears are being realized in real time, and it is the consumer who is left worse because of it. As Freeney notes, the TNC designation is a win for incumbent ridesharing companies – not only because they can now operate legally, but because these new regulations limit the ability of smaller competitors to enter the market. While current ridesharing companies seem to welcome the regulatory protection today, it may prove to be the greatest impediment to continued growth and development of ridesharing in the future.

In terms of limiting competition, the TNC designation is an instant win for incumbents like Uber and Lyft. Organizing and running a successful startup is expensive and complicated enough, but the TNC regulations simply add additional barriers that make it costly for smaller companies to enter the market. Under Virginia’s pending TNC laws, for example, any company wishing to offer ridesharing services must pay the state a $100,000 licensing fee and $60,000 every year thereafter. These costs are relatively insignificant when viewed in the context of companies valued in the billions of dollars; however, they may be insurmountable for most startups looking to begin their own ridesharing venture to compete with those established firms.

Many argue that limiting those who can enter the market in this manner serves some public benefit. After all, limiting entry to protect consumers was the driving justification behind the taxicab regulations that persist throughout the United States. In fact the opposite tends to be true.

As I have noted in my research (with Adam Thierer and Matthew Mitchell), when competition is limited, consumer welfare suffers. Limiting the number of entrants and the ways in which they can compete, all in the name of “consumer protection,” actually undermines both the competitive rivalry within the industry as well as the incentive for firms to distinguish themselves in the level of customer service they provide.

As a result, consumers are often left with higher prices, fewer choices, and lower quality service. Barriers to entry mean that incumbent firms have little need to focus on satisfying consumer desires; instead, their success depends upon their ability to court regulators and retain regulatory protections. Over time, barriers to entry ensure that firms become sluggish, lazy, and less alert to the sorts of entrepreneurial innovations that drive consumers to purchase products or use their services.

The general lack of competition caused by taxi regulations explains the absence of customer care among taxicabs that created the opportunity for ridesharing to become as popular as it is today. Conversely, it is the current state of vibrant competition among ridesharing services that has reduced prices and improved conditions for drivers. It has also brought us on-demand ice cream,puppies, and toilet paper.

Moreover, while firms such as Uber and Lyft may be more than happy to accept the TNC regulations as a way to limit competition today, it may ultimately prove fatal to their own continued growth and development tomorrow. While Feeney believes this classification may limit Uber’s ability to grow outside of ridesharing, UberRUSH, UberMovers, and UberESSENTIALS all demonstrate that the company has moved far beyond simply driving people from one point to another.

Instead, I believe that the TNC designation will ultimately limit the ability of firms to grow within ridesharing. Specifically, the TNC classification is built on two basic assumptions about the relationship between the transportation network company and the cars being used to transport passengers: First, it assumes the transportation network company does not own the car. Second, it assumes that a person drives the car. For those states that have adopted the TNC designation, these two assumptions permeate their regulations.

While this may seem innocuous or benign, these regulations may have unintentionally foreclosed the opportunity for firms like Uber or Google to continue to push the margins of how ridesharing is provided. In particular, the issue of who owns or drives the cars takes on an entirely different character in light of Uber’s recent partnership with Carnegie Mellon University to research autonomous technology, or rumors that Google may offer its own ride-hailing service using autonomous cars.

Bringing these services to consumers would necessitate redefining the term “transportation network company.” Regulators would need to rethink how these companies may interact with drivers, or whether drivers are required at all. Regardless of how those questions are resolved, these issues would need to be re-debated each time ridesharing outgrows its current classification.

In addition, given the standard approach among states that otherwise yet-to-be-regulated ridesharing is illegal, those able to employ on-demand autonomous vehicles would first need permission before doing so. This would create a constant cycle of starts and stops, as regulators continually work to catch up to the sharing economy. Of course, this is all dependent on any given regulator’s willingness to adapt and evolve with a changing economy. If history is any guide, this may be the biggest hurdle to overcome.

Consider the destructive effects that regulation of this nature will have on a rapidly evolving space like the sharing economy. The market, as a process, is driven by entrepreneurs discovering new ways to meet consumer needs. The sharing economy, and its use of technology, has accelerated this process compared to many other industries. Regulation by its very nature imposes a type of stasis on this dynamic process. The juxtaposition between the market process and regulation is magnified by the speed with which the sharing economy is continually antiquating the attempts to regulate it.

Does this mean that doing nothing will leave the sharing economy somehow unregulated? Certainly not.

There are already a plethora of laws in existence – including both civil and criminal – that cover liability, theft, fraud, and other potential harms that many of these new regulations seek to address. Policymakers should first apply the existing legal apparatus before attempting to create a new one. And when the existing framework is unworkable they should, as Adam Thierer explains, strive for simple legal principles rather than complex “technology-specific, micromanaged regulatory regimes.” The watchword going forward should be “permissionless innovation.”

In sum, Feeney is correct in his assertion that regulators should resist the urge to impose old taxicab regulations on – or write new regulations for – the sharing economy. However, regulators should not do so because the industry deserves the chance to compete, but because it will make competition healthier and consumers better off. The sharing economy of today must be allowed to compete with and challenge the business models of the past. And – just as important – tomorrow’s innovators must be able to challenge today’s upstarts, who will soon enough be the incumbents.