Regulations Are Strangling the Internet Economy
Recently, the Virginia Department of Motor Vehicles issued a cease-and-desist order against Uber and Lyft, ride services that are simply an app away. Regulators appear unsure how to handle these companies, along with other upstarts in the sharing economy, such as Airbnb, which finds rooms for travelers online. These new companies have clearly passed the market test by providing benefits to consumers, and it's past time for regulators must remove hurdles that are handcuffing these innovative services.
It is not surprising that regulators are struggling to deal with these innovators. Regulations are inherently static in nature, attempting to control a market as it is defined when the rule is written. However, markets are dynamic, constantly changing and evolving as producers find new ways to serve consumers better than their competitors. Product innovations, technological innovations and marketing innovations are aggressively pursued to gain more customers. Consumers benefit from this competition in the marketplace through falling prices, greater choices and improved service.
Unless, of course, regulation protects incumbent providers by limiting competition. Businesses spend millions in Washington and state capitals pursuing regulations to limit competition and shore up their position in the marketplace. Such regulations harm consumers while providing no economic benefits. While markets and technology have evolved in ways that serve consumers better, those benefits are threatened by politics and regulation.
Technological advances often provide new avenues of competition, allowing competitors to emerge even in industries that have been heavily regulated. The Internet has been a major impetus for change in a number of industries that allows consumers direct access to a wide range of producers. From online travel reservations, to mortgages and insurance, to online shopping, consumers are finding opportunities to save money by skipping the middleman and dealing directly with service providers. Yet, the initial reaction to these changes often has been an attempt to block new competitors through regulation. Today, no one thinks twice about logging on to Travelocity to purchase an airline ticket; why should it be illegal to turn to your smartphone for a ride across town? Uber, Lift and Airbnb are the latest innovators to face these threats.
Not all firms welcome competition. Existing firms with entrenched market share often seek ways to eliminate new competitors. The public choice literature on rent seeking has examined the ways that businesses turn to the government to deter new entrants and shore up market share. Tax and regulatory policy can be used to prop up the revenues of existing firms while deterring new entrants. Unfortunately, when this happens, consumers are left with higher prices and fewer choices.
This nexus between government and entrenched business interests further dampens economic growth by diverting resources from innovative and productive activities and toward more politically oriented investments that are more predatory than productive. Rather than promoting innovation and consumer welfare, public policy becomes more focused on the distribution of existing rents.
Technological innovation is prompting a transformation as significant as the industrial revolution. Indeed, technology is expanding the gains of the industrial revolution in important ways. And these new technological innovations are available to businesses of any scale, leaving small businesses as some of the greatest beneficiaries of technology. Airbnb, Uber and Lyft will be followed by others who identify new niche markets or lower-cost ways of doing business. New technologies promote specialization and new opportunities by reducing information costs, allowing producers and consumers to readily find one another without the need for intermediaries, and redefine how business is conducted. But both government policy and businesses seeking refuge from the intense competition of the Internet may introduce barriers that ultimately limit competition to the detriment of consumers.
Markets and technology have evolved in ways that serve consumers better, but those benefits are threatened by politics and regulation. Before intervening, a true market failure needs to be identified. Regulators should work to ensure that regulatory barriers do not impede consumer choice for the benefit of incumbent producers. The best measure of regulatory policy is consumer welfare, and economists have demonstrated that consumers are best served by open and competitive markets.
Unfortunately, these consumer benefits are held at bay by regulations that have failed to keep pace with the marketplace. Regulators should focus on removing unnecessary impediments to allow the market to serve consumers better using all the latest technologies.
