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Regulate the Sharing Economy Parent Companies, Not Individual Providers

| Sep 22, 2014 | Opinion

    Much of the discussion about regulation of the sharing economy has focused on regulating the individual service providers—those hundreds of thousands of people lending their homes, cars, and time through services such as Uber, Lyft, or Airbnb. A second, but perhaps more critical, regulatory issue is whether and how to regulate the parent corporations that establish the brand recognition and information technology networks that enable the sharing economy to flourish.

    Mobile Phone - Sharing EconomyFrom the perspective of regulators and customers, it is actually more effective and efficient to regulate parent companies than individuals. Still more interestingly, targeting parent companies may also be in the long term interest of the sharing economy companies themselves—and their investors.

    Particularly when it comes to car services, municipalities are struggling with the resources necessary to regulate thousands of independent drivers to ensure that safety measures, insurance, licensing, and similar provisions are in place. But regulating the companies instead of the individual service providers would reduce this regulatory burden dramatically. The reason is simple: there are fewer entities to be regulated, and the companies have the resources and incentives to ensure compliance with safety and insurance requirements.

    For customers, regulating parent corporations would provide greater assurance that sufficient resources will be available to compensate them for harm if there is an accident or other safety incident. With car services, for example, many drivers have only personal car insurance, not the commercial car insurance needed to cover the driver or passengers in the event of an accident. Municipalities face a heavy burden of tracking insurance information, and if individual drivers do not have the proper insurance, most will be judgment proof in the event of an accident.

    By contrast, if the parent companies were regulated, these companies could be required to provide insurance as well and thus have a greater incentive to ensure safety checks to reduce the risk of lawsuits. These parent companies, several with market capitalizations of many millions of dollars, would also have the market power to negotiate the best insurance rates, ultimately reducing costs to consumers.

    While it is fairly clear that regulation of parent companies works to the advantage of municipalities and consumers, why should sharing economy companies welcome regulation at the corporate level? The answer lies in the experience of airlines in the wake of deregulation.

    After deregulation of the airline industry, there was a flowering of new airlines. This increase in airlines drove ticket prices down to the level where none of the airlines were making money. Within a few years, almost all of the new airlines were gone, most of the remaining airlines declared bankruptcy, and today it is almost impossible for airlines to operate profitably.

    A similar trajectory will likely be repeated in some, if not all, sharing economy sectors if the regulatory requirements are placed on individual service providers rather than on parent companies. Right now, it is quality of service and price that drives customers to use car services like Uber and Lyft instead of traditional taxis.

    However, if there are no regulatory requirements on ride-sharing companies, there is nothing to stop just about any person with a laptop from setting up a competing enterprise. Just as deregulation caused a spike in the number of airlines, lack of regulatory oversight in the sharing economy will cause a proliferation of ride-sharing services. It is foreseeable that a continuing increase in ride-sharing services will drive down prices to rock bottom levels and allow fly-by-night operations to degrade the reputation of the entire sector.

    In these untroubled days, the concept of regulation of the ride-sharing parent may sound like an anathema to the parent companies. But looking past the initial gold rush—anyone remember pets.com?—the ride-sharing companies themselves should favor regulation of the corporate entities, as should regulators and consumers.


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