Regulating Online Platforms: Where, Not Whether, to Draw the Line

A Position Paper in Prepared in Advance of the Platform Strategy Research Symposium July 14, 2016

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1. Introduction

We all want to keep the internet as open, as flexible, as innovative, and as valuable as possible. And many of us assume that this means the net should be subject to no regulation at all. This argues for letting innovators, entrepreneurs, and investors try as many things as possible, as quickly as possible.

And yet most of us can agree that some form of regulation of online platforms is appropriate. Imagine Hootel.com. In Hootel.com you not only acquire a room in a foreign city for a couple of nights, but a sexual companion as well. Most countries, most states and provinces, and most cities would agree that they have a legal and moral right to regulate such platforms in the interest of public safety.

2. OK, Some Regulation May Be Justified

Most of us agree that there is a line that platforms should not cross. But where do we draw the line?

Should we permit Airbnb to flourish because it is economically efficient to allow the owners of properties to find their most economically valuable use? If it is more profitable for building owners to refuse to renew the leases for some apartment residents in San Francisco and to convert their properties into full-time Airbnb rentals, should we permit it without question? If the residents object to being evicted from their apartments rather than having their leases renewed, or their neighbors object to having strangers and transients in an apartment building so that their home feels like a hotel, should we protect residents instead of property owners? If hotel operators argue that owners who rent through Airbnb have an unfair advantage because they pay fewer taxes, have fewer regulations on safety, or can locate in residential neighborhoods where hotels cannot, should we impose greater restrictions on Airbnb to level the playing field? Who would really benefit from these additional laws and regulations and how do you balance competing interests?

If taxi and limo drivers object to Uber Black should we care? If Uber Black is more efficient than a limo company because of its technology, is that enough reason to endorse Uber? If Uber Black makes better use of its resources than taxi companies do because it is unregulated, is that enough reason to let it operate in competition with taxi companies? Is there any legitimate basis for an objection to Uber Black? What about the other forms of Uber, which compete more directly with taxis throughout the day? Should Uber Taxi be subject to all of the same regulations as traditional taxi drivers? Who would really benefit from these additional laws and regulations and how do you balance competing interests?

Suppose that a platform gains an unfair competitive advantage over other online firms by integrating numerous services. What is an unfair advantage?

  • Is it unfair for Google to promote its own products over those of competitors? If Google believes that its own offerings are superior, and if it provides them to consumers without charge, then who is being harmed?
  • Is it unfair for Google to bundle so many services into its platform? Are consumers harmed by the number of free services Google offers, essentially destroying potential competitors? Or do consumers benefit from these services, which are mostly of very high quality, mostly well-integrated into Google's portfolio of offerings, and almost always free?

Is it necessary or appropriate to try to protect consumers from harm they might potentially suffer online? Is it really possible that some consumers cannot judge the impacts of their online activities? Is it possible that some consumers don't know how their online histories can lead to their paying higher prices, or even being denied employment or being denied access to some services?

3. So Where Should Regulators Draw the Line?

How should regulators choose where to draw the line when regulating online platforms? I believe that responsibility for providing guidance and guidelines falls upon the academic community that studies online platforms, if only by default. The community of internet innovators and entrepreneurs want no regulation at all, and it is hard to blame them. Regulation will cost innovators and entrepreneurs significant amounts of money by reducing investment opportunities, and they are going to be reluctant to impose restrictions of any kind.

The legal and regulatory community is trying to use the same frameworks that have been used for decades, with only mixed results. The amount of information available for targeted advertising today is qualitatively different from anything in the past. Traditional privacy regulation is not adequate in an era of big data, when we can identify almost anyone uniquely from his or her transaction history without relying on name, tax id, or street address. Online anonymity is a myth. And targeted marketing online does not just mean sending unsolicited ads, but also means price discrimination.

Academics are beginning to study the legal, economic, strategic, and social welfare implications of platforms. The Platform Strategy Research Symposium at Boston University addresses the most current research topics in platform strategy and economics, including regulation.

4. Candidate Topics for Discussion of Platform Regulation

The symposium will address each of the following, not because they require tighter regulation, but because they require further clarification.

  • Does the platform create value or merely exploit a regulatory loophole? Uber Black provides a new service, a real-time market for cars and drivers during periods of peak demand when traditional taxi service is inadequate. Uber Taxi may simply be competing with traditional taxis, offering lower fares because they are subject to fewer regulations. If so, should Uber Taxi face stricter regulations, or should the regulations on taxis be relaxed?
  • Does the platform create an environment in which market competition cannot effectively determine prices, requiring regulatory attention? As we have discussed previously in this journal, there are categories of systems where the user does not pay for platform use. These are called third party payer systems. The best known examples are Google and bank credit cards. Searchers do not pay to search; firms that need to be found pay to not be not found and competition between Google and Bing does not limit the price of keywords. Merchants need to accept credit cards, and competition among credit card issuers has raised the costs of their rewards programs, which are almost entirely borne by sellers; competition among credit card issuers does not limit the fees paid by merchants.
  • Does the platform create negative externalities that might disadvantage some consumers? Negative externalities occur any time any of us engages in activities that harm others. Negative externalities have been discussed by economists since the beginning of economics as a discipline. Does Airbnb harm anyone? It survived the referendum on Proposition F in San Francisco, but an informed debate on the externalities of rental platforms is still necessary.
  • Does the platform create an environment in which platform envelopment provides the platform operator with unfair competitive advantage? Again, I'm not sure what an unfair competitive advantage is. Is vertical integration by a search company an unfair form of platform envelopment?
  • Does the platform exploit an environment in which some parties can exploit differences in regulation across borders? Google and Facebook earn their revenues in large measure through the value of the private information they are able to collect on their billions of users. These revenue sources are not available to European firms, which mostly adhere to stricter European privacy regulations. Google and Facebook can use these revenues to cross-subsidize other services, offering them at prices that European competitors cannot match. Should American firms be forced to follow the same privacy rules that European firms must follow? Is this simple self-protection, or an form of illegal non-tariffed-based protectionism?
  • Can consumers really judge the benefits and rewards, costs and risks, of using a platform? Are strong restrictions required to protect young internet users, the way society limits teen drinking and smoking?

5. Who Should Decide?

Ultimately, the entire internet ecosystem, of users, developers, and regulators will need to weigh in with their opinions and analyses.