Regulation in the 21st century

The challenge for regulators is to avoid stifling innovation but at the same time ensure equitable application of rules that have been set up to regulate businesses


The internet has rapidly evolved from information sharing to e-commerce and now into a method of accessing real world services. Photo: Bloomberg
The internet has rapidly evolved from information sharing to e-commerce and now into a method of accessing real world services. Photo: Bloomberg

In 2012, the state of Minnesota in the US briefly banned free online education. That’s right, a government thought it was a bad thing for people to educate themselves for free. The government essentially banned universities from offering classes online without taking permission from the regulatory body which included a registration fee. We in India are no strangers to stranger regulations; the banning of surge pricing by taxi platforms in Delhi in April 2016, during the odd-even experiment, is one of many examples. However, the Uber/Ola debate does not seem to go away. Recently, taxi unions in Delhi were on strike (again!) protesting against aggregators taking away their jobs. This is nothing new and strikes have been happening in Delhi and Mumbai since Uber and Ola set up shop. For that matter, textile workers in the 18th century broke spinning jennies to protest the imminent loss of jobs. In fact, Uber has faced challenges in almost every jurisdiction from strikes by Paris taxi drivers to falling foul of New York city’s transport authority.

The “gig economy” or the “sharing economy” refers to online platforms that let workers sell their services or products directly to consumers on their own time. The 20th century was characterized by people staying in one company for their lives. The corporation was the mode via which the workforce was organized. The current workforce changes jobs several times in their lives. The gig economy is an evolution of that trend where people work when it suits them or when they need money. There are many benefits of a gig economy. It enables better utilization of resources, increasing supply. By lowering prices, it adds to real disposable income, stimulating demand. It creates new markets which generate employment opportunities in other sectors. Online platforms also enable more efficient pricing and better supply-demand matching. Its impact in developed markets has been powerful, increasing supply, reducing prices and compressing profit margins and surely raising consumer welfare.

The advantage of the digital economy is the reduction of transaction costs which make customized transactions viable and thereby reduce under-utilization of assets. Data is at the heart of this revolution and manifests in the way that people consume goods and services. This results in a challenge to an existing player that is subject to existing government taxes and regulations. Their favoured response, that is, to strike informs even more people about the existence of alternatives and is akin to shooting oneself in the foot. The challenge for regulators is to avoid stifling innovation but at the same time ensure equitable application of rules that have been set up to regulate businesses and protect consumers. Platforms are able to provide solutions to some governance failures too. There is a security concern in using shared services. But, by verifying identity and reputations, platforms can mitigate such scenarios. They can also enforce requirements for criminal checks or insurance.

The government must remember that the ultimate purpose of regulation is to tackle market failures so that commercial exchange is not stifled by information asymmetries or blocked by firms with too much market power. Profit is a more powerful driver for quality than regulatory compliance (in the presence of competition). In the gig economy, reputation serves as the institution that protects buyers and prevents the market failure that policymakers worry about. Regulation to maintain quality is an option but if a hotel room is dirty, a bad rating and review on TripAdvisor would hinder future business and act as an incentive to maintain quality.

Reputation is definitely important in the gig economy, but biases may affect ratings. In a society cleaved by differences for millennia, we cannot afford to let these propagate as they would further the economic and social exclusion of individuals. Algorithms need to correct for biases so that these reputation systems don’t create a barrier to access. Biases exist in the traditional workplace too but as we look forward we should aim higher. With big data and artificial intelligence (AI) developing fast, it should be possible to correct these. Reputation is going to be the gateway to access and the government can mandate supervision of algorithms to recognize bias and remove it. This works the same way as anti-discrimination laws. As an example, credit card approvals were fraught with biases in the 1980s in the US against black applicants and applicants from certain locales. But, banks recognized this and have designed credit scores that calculate the probability of fraud more objectively and minimize bias.

Arguments can be made against some aggregators on the basis of predatory pricing. It would be interesting to see how they fare without subsidizing consumers and service providers. There are also arguments to be made that sharing platforms have economies of scale that encourage a monopoly and should be regulated like utilities. But, these platforms are not silent intermediaries. The seek to actively shape markets they create. Because the potential of these platforms is huge, they will be highly disruptive in the short term. The government has a very important role to play in establishing contracts but should be careful to not try to guide development with too little information. For even with a lot of information, the platforms themselves are not sure yet and are experimenting with various business models.

The internet has rapidly evolved from information sharing to e-commerce and now into a method of accessing real world services. This takes us back to the basic tenets of capitalism where everyone is capable of being a business owner and set prices for their services. The growth of sharing economy companies like Taskrabbit or Elance has enormous implications for how we look at work in the 21st century. Social security, labour laws and retirement plans will need to take into account the greater prevalence of freelance workers. We will soon be facing a world with driverless cars and the government should be aware of the changes it would need in terms of regulation to allow them. AI bots are now being employed by law firms, call centre workers will soon be replaced by Siri. Do we know how to respond?

Saurabh Roy is a fellow with Pahle India Foundation.

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