Labour & Industry Taxes & Economics

Regulation Concerns in the Rise of the Sharing Economy

Hinged on consumer trust, reputation and ease of operation, the so-claimed “tech companies” such as Uber and Airbnb are mere units of a burgeoning sharing economy. As self-explanatory and spectacular it sounds, it simply isn’t.

Now don’t get me wrong, I am a huge fan of Uber especially for last-minute weekend bonanza and those who travel frequently would admit what a blessing Airbnb is. So what are the issues with such “revolutionary” technologies?

That, right there, is the problem. Contrary to popular beliefs, these innovative sharing platforms have not revolutionized the existing industries ( i.e. the old yellow cabs and hotels) but only expanded demand by further serving them. And as far as the innovative approach goes, similar models have been undertaken in the past, a good example being the ‘asset-light’ model by major hotel companies including Marriott and Hilton and hospitals such as Ivy Hospitals.

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In such a modus operandi, hotels strike up deals with investors to share percentages of profits made out of a location instead of buying the land. If framed in such a way,  Airbnb is just a successful extension of this century-old idea.One might argue that the use of technology with its incredible flexibility is the reason behind soaring success for Airbnb. To that, a simple rebuttal would how every major hotel has a functioning smartphone application and Airbnb isn’t something fundamentally new.

However what these companies have successfully managed to do is disrupt the status-quo, i.e. include the word “sharing ” in the tight “buying against selling” global economic model and in the minds of disgruntled consumers fretting over rising inflation and prices of goods.  So after discrediting the neoteric aspect of these companies, let’s try to understand how these companies are exploiting loopholes in the current regulatory framework in the guise of tech startups.

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Uber has a competitive advantage, but only because it chooses to ignore the rules other taxi companies operate under, and mostly gets away with it. Uber can offer lower fares because it doesn’t have to bear the cost of HST on the fare, or city-imposed safety and licensing standards. That’s not fair competition.

Uber’s other advantage is that it ignores the city’s fare structure. Blue Line and other Ottawa taxi companies charge only what the city allows them to charge, and those fares have gone up in recent years to allow drivers to earn a better living. The taxi industry charges the same amount any time of day, any day of the week. Uber charges less during slow times, then escalates fares when things are busy.

Uber is further capitalizing on this uneven pricing field by running sales this summer. In Boston. Los Angeles, San Francisco, and Seattle, for instance, the company cut UberX prices by an additional 25%. On Monday, UberX prices in New York were discounted by 20%, making the service cheaper than regular taxis. As a result, with the gulf between Uber’s prices and regulated fares widening, taxi drivers are at a further disadvantage.

But perhaps, Uber’s most controversial exploitation of the market is practicing predatory pricing strategy through seasonal discounts. For example, at a summer discount of 25%, a $25 fare ride would cost only $15. But since Uber runs on an 80-20 split model that excludes any discounts, the driver earns $16, hence resulting in a $1 loss for Uber.

Uber has relied on its 15 billion dollars in venture capital to be able to offer rides to people at a price significantly lower than what it costs to sustainably run a ride-hailing service. However, as per the World Trade Organization, this is grossly illegal as it constitutes an unfair market by driving competitors and giving birth to de-facto monopolies.

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Uber’s business model also includes aggressively flooding its target markets with new cab supply, ignore its operating losses and keep going until the traditional industry has collapsed. This has already happened in San Francisco where Yellow Cab Cooperative, which is made up of 300 owners and operators with more than 500 cabs, has filed for Chapter 11 bankruptcy in 2016. There have also been grave concerns of “Uber employees” getting below minimum wage and credibility of Uber drivers in the face of rising complaints and road accidents.
So how does an idea sharing economy look like? Like with all policies, the answer isn’t so clear-cut. However, there is some consensus regarding deregulating the legacy companies because heavily regulating Uber and its counterparts isn’t a consumer-friendly solution.

Despite low contractor (employee) satisfaction for both Uber and Task Rabbit (due to no minimum wage and long working hours), strict regulation will harm both consumers (lose cheaper rides) and contractors(who lose their flexibility). Instead, more competition should be fostered among them. One such step would be creating a universal system that reserves ‘Reputation Capital’ from all sharing economies( e.g. a digital database where both Uber’s and Lyft’s reviews are stored up) so that recurrent bad reviews result in lower demand for those services.

This, in turn, will deter both customer and employee exploitation. An example of this can be enforcing the use of a third-party application like ‘Trust Cloud’ when users try to sign up for services. So when someone sees better reviews for Lyft than Uber (because Lyft is now holding mandatory monthly reviews of etiquettes for drivers and taking complaints more seriously), he or she will call a Lyft. And since this is bad news for Uber, so Uber will most likely take hiring drivers and other protocols more seriously. This will also create more innovative schemes (e.g. low summertime ride prices) in the long run while giving consumers more choices.

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