FTC report highlights challenge of how to best regulate 'sharing economy' platforms

Watchdog should look to the users for help

User rating and review services provided by online platforms can help reduce the need to regulate the "sharing economy", according to a report by a US regulator.

The Federal Trade Commission (FTC) report (100-page / 2.26MB PDF), said, though, that the deployment of "trust mechanisms" alone might not "address externalities" that derive from the operation of sharing economy platforms.

The sharing, or collaborative, economy is a term used to describe operations where ordinary people trade the use of their assets with consumers who have a temporary need for them, usually over digital peer-to-peer platforms.

"Trust mechanisms may play a significant role in reducing concerns resulting from information asymmetries, and therefore may reduce the need for some consumer protection and safety regulation designed to address such problems," the FTC said. "Platforms generally have strong incentives to use such mechanisms to protect their consumers. Platforms earn money by facilitating transactions between buyers and sellers, and thus have direct incentives to address consumer protection and safety concerns, because such concerns can impede transactions and therefore reduce the profitability of the platform."

"However, platforms may have weaker incentives to adopt these mechanisms to address externalities, i.e., impacts on third parties or other public interests, since addressing such impacts may not directly promote transacting on the platform," it said.

The FTC's report on the sharing economy highlighted the particular growth of use of platforms such as Uber and AirBnB which facilitate for-hire transportation and short-term lodging services respectively.

The report, amongst other things, looked into how businesses participating in the sharing economy should be regulated. It said that sharing economy platforms "may have little monetary incentive to address issues that impose costs only on third parties", but that service providers that use the platforms as marketplaces and the platforms themselves "may have an interest in addressing such harms if they could be liable to third parties for such harms".

Regulators face a challenge in how to regulate businesses participating in the sharing economy, particularly since they operate on business models that differ to traditional market incumbents that they are competing with, the FTC said.

The FTC report said: "On the one hand, regulatory measures may be needed to protect consumers, promote public safety, and meet other legitimate governmental goals. On the other hand, regulation can chill incentives for innovation by increasing costs and decreasing potential returns, thereby impeding or preventing new entry and depriving consumers of the benefits of new product and service offerings. Lawmakers and regulators face a challenging task in balancing these concerns."

"The novel products or services at issue, or the manner in which they are supplied, may be quite different from those of incumbent firms with which they have ample regulatory experience. Moreover, disruptive innovation tends to produce dynamic, evolving markets, complicating the task of adjusting regulations," it said.

In the for-hire transport and short-term lodging sectors, specific trust mechanisms have played key roles in addressing consumer protection and safety concerns. Platforms in both sectors use reputation mechanisms extensively to provide information to consumers and providers about the person with whom they are dealing.

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