Co-Regulating the Platform Economy

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To regulate the digital economy, regulators must cooperate with platform firms, says scholar.

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What is the platform economy? Although it is easy to point to companies that are part of this emerging technology-facilitative segment of the economy—for example, Airbnb, Amazon, Uber, Kickstarter, Rent the Runway, and many others—regulators such as the European Commission, the Federal Trade Commission, and the French Digital Council have had great difficulty agreeing on a precise definition of this growing sector.

According to Michèle Finck, a senior research fellow at the Max Planck Institute, regulators’ lack of consensus on the precise definition of the platform economy has made the task of effectively regulating platforms more difficult. Indeed, Finck elects to define platforms only by what they are not: “conventional, static, and easy to qualify.” Into which regulatory categories do these firms fit? Does Airbnb fall into the regulatory category of a hotel? Are Uber drivers employees or contractors?

Not only do regulators have a hard time fitting platform companies into preexisting regulatory categories, but uncertainty on the part of regulators, Finck argues, could cause excessive, unnecessary regulation, slowing down platform development and limiting the global reach of the services provided by these platforms. But, if platforms are not regulated, they could amass too much power, which, if left unchecked, could raise issues in the antitrust sphere and beyond.

Co-regulation—a process by which public regulators define regulatory objectives and then leave those objectives’ attainment to parties in the regulated field—emerges as the best solution for platform regulation, argues Finck. She contends that platforms have more data about their operations and impacts than do regulatory authorities and can better enforce relevant rules; however, she also explains that public regulators can better determine what the rules and limits should be in the service of the overall public.

Currently, platforms are self-regulating entities—they regulate the terms, conditions, and standards of behavior accepted by their platforms. For example, in the United States, any user of Uber—a ridesharing platform—who violates its rules loses access to the service.

Finck explains that platforms prefer to self-regulate, since they claim to have more knowledge of their operations and better enforcement mechanisms than traditional regulators.

But the problem with pure self-regulation of the platform economy, Finck states, is that it lacks transparency, and platforms are likely to act solely in their own interest, without sufficient consideration of the interests of other actors. Although platforms have much more information about the platforms themselves, Finck argues that platforms do not have as much information about the regulatory needs of a specific area as do public authorities.

For co-regulation to be most effective, Finck suggests that a variety of stakeholders and decision makers, including “industry associations, academic centers, think tanks, companies and platforms,” should be included in the regulatory process.

Platforms do hold essential data about their current operations and their plans to develop, which regulators need to make informed decisions. This information asymmetry, explains Finck, makes it necessary to involve the platforms in gathering the information needed to create timely and effective regulations. Also, involving the platforms makes enforcement much easier; through a few lines of code, a platform can ensure that its users pay taxes and comply with other rules, says Finck. This level of enforcement would be much more difficult, if not impossible, for public regulators to achieve.

Finck uses an agreement between the city of Milan, Italy and Airbnb as an example. Milan approves rules allowing residents to share their homes through Airbnb on the condition that Airbnb cooperates with data requests by public authorities, in addition to agreeing to other conditions.

Such data sharing is an integral part of co-regulatory solutions. This type of cooperation is helpful to governments in other ways, says Finck. Airbnb specifically promotes that their platform can help governments “collect millions of dollars in hotel and tourist tax revenue at little cost” and can “enable smart decision-making about home sharing rules without compromising hosts’ or guests’ privacy rights.’”

Finck posits that co-regulation is an “on-going process,” as it enables regulators to embrace uncertainty and make appropriate changes as they come, which is why evaluating and reviewing these evaluations and changes constantly is so important. But many actors need to collaborate to make this possible.

Finck contrasts co-regulation with “command-and-control regulation”—or regulation characterized by top-down legal rules backed by governmental sanctions. As currently practiced in the European Union, command-and-control regulation creates uniformity across the continent, notes Finck. She says that the European Commission generally promotes this type of uniformity, claiming that regulatory inconsistency throughout Europe “complicates (or even impedes) market access and limits investment opportunities for platforms.”

Finck suggests that command-and-control regulation cannot work effectively for the platform economy because of the information asymmetry between regulators and regulated parties. This information asymmetry could result in rules that stifle innovation or encourage platforms to seek jurisdictions that have a self-regulatory approach or leaner rules. More importantly, Finck argues, the information asymmetry between platform firms and public regulators could result in rules that are ineffectual or unenforceable, since the platforms will not give over the necessary information.

In the end, Finck urges that only a co-regulatory framework can both promote further development of the platform economy and take into due consideration all the interests of society.