The sharing economy: A theme for regulation in the digital age

The sharing economy: A theme for regulation in the digital age

By Nikolaos Korfiatis
Assistant Professor in Business Analytics and Regulation, University of East Anglia
Associated faculty, Centre for Competition Policy (CCP)

We can now use platforms such as Airbnb and Uber to find alternatives to licenced providers of a number of services such as hotels and taxies. Most of the recent attention by investors to the so-called “disruptive” potential of digital platforms, which allow the co-exploitation of an asset by more than one agent, draws on the discussion of whether such a possibility creates opportunities for consumers and companies. While consumers generally tend to welcome the possibilities that are given to them in finding better alternatives to traditional service channels from a price point of view (e.g. renting a spare room for a short stay rather than staying in a hotel), quite often this poses difficulties for companies and traditional agents in these markets. This presents a regulation gap where traditional licencing barriers to entry become obsolete once digital technology takes over.

Why is this happening now? What is new in terms of technology that has enabled the introduction of such innovations to traditional markets? How does traditional economic theory deal with these cases? With regards to the latter, a possible linkage can be made to Buchanan’s seminal paper on Club Goods (1965) . What motivates such a concept is the missing gap between Samuelson’s classification of purely “private” and purely “public” goods, with the ultimate aim of determining the optimal cost and benefit arrangement that will allow club goods to find an optimal service and price level.
The answers to why club goods have become more prominent are (a) the development of digital technology that has enabled better coordination among the individual agents and (b) the addition of a trust layer represented by mutual evaluation by both sides.
Platforms that allow agents to join a club and other agents to offer a club good have resulted in better levels of price and service for the consumers themselves.

Nonetheless, while the price positioning creates a better alternative to consumers and increases competition for services, the question from a regulatory point of view can be centred in two aspects: (a) Do the traditional service providers have to deal with unfair competition and (b) Are other classes of consumers, such as long-term residents, kept out of the market, for example because the supply side has better incentive to offer a short term lease hold on their rental?

To reflect on what kind of regulatory concerns a regulator may deal with it would be useful to concentrate in this note on two examples where protests from traditional agents have become apparent: Uber and Airbnb. Uber is a popular taxi-hailing app that was founded in 2009 in San Francisco and has become a popular example of how mobile technology can transform a traditional market such as taxi transport. Uber operates in three modes; UberTaxi, UberBlack and UberPOP. The latter is a two-sided app where anyone with a driving licence may turn their vehicle into a taxi and collect customers. UberTaxi and UberBlack use qualified drivers to serve normal taxi and limousine customers. Airbnb was founded a year earlier (2008), also in San Francisco, with the aim of better serving lodgers and renters in their matching process. It has since expanded internationally and currently dominates the market for short-term rentals of various types, ranging from standard accommodation, to single rooms, to apartments and flats in major cities around the world.

With respect to Uber, the regulatory jurisprudence so far has resulted in a mixed reception. Some local authorities question whether Uber drivers qualify as taxi drivers and thus whether they have the right to collect fares. In London, an action against Uber was brought before Transport for London last year by the incumbent operators of Hackney Carriages (black cabs) with the argument that Uber interferes with their right to be the sole users of taximeters in the Greater London area. While the case resulted in a consulting ruling from the High Court, Uber was allowed to operate based on the gap in the definition of whether the Uber smartphone application should be considered a taximeter. In this case, the technological development has posed a clear gap in legislation. Other rulings, such as the case brought to the German courts in Berlin and Frankfurt by taxi drivers’ associations, resulted in some of Uber’s services (UberPop) being banned nationally. The rulings cited the fact that [Uber] violates the current transport law by allowing unregulated vehicles and unqualified drivers, who are also not insured for such operations, to serve customers.

Airbnb has faced similar challenges based partly on its rapid adoption by private renters as a way to gain share in the short-stay market traditionally served by hotels. In cities with large fluctuations in demand, such as tourist destinations in the summer or cities hosting events, Airbnb offers a cheaper alternative because it allows for new entrants to the market. Despite this, cases have been brought to courts about the side effects of Airbnb’s operations compared to traditional hotels. In New York last year the Attorney General filed a legal proceeding against Airbnb arguing that it violates local real estate law on the availability of records on renters of apartments (and, subsequently, if they have the right to rent the apartment). In continental Europe a similar ruling by a Berlin court gave the right to landlords to evict tenants for subletting their property on Airbnb without consent. While Airbnb’s model is based on matchmaking, the financial incentives it creates for renters may lead to negative spillovers on the wider housing market. In many cities Airbnb has been accused of being a large cause of limited supply of rental properties, due to landlords having a greater incentive to rent to short-term lodgers rather than long-term residents. This can have a negative effect and crowd out tenants living in places with high seasonal demand. On a more positive note, Airbnb was welcomed by the organisers of the Rio 2016 Olympic Games as an alternative accommodation partner for contributing to an increase of available accommodation space during the Olympics.

A major question is whether a regulator should intervene to set rules about the levels of service required and on the extent that existing rules should be adapted to the digital age. In several areas of innovation it seems that regulators tend to catch up after a short time or sometimes very late (e.g. regulation concerning self-driving cars). In any case, exploring such themes from a regulation perspective and making sure that unfair competition on the one hand and proper enforcement of the regulations on the other hand can help unleash the great consumer welfare increases that these services can certainly offer.


[1] James M. Buchanan (1965). “An Economic Theory of Clubs,” Economica, 32(125), N.S., pp. 1-14. Reprinted in Robert E. Kuenne, ed. (2000). Readings in Social Welfare, pp. 73-85.





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