Friday, September 13, 2013

The Sharing Economy, Disruptive Innovation, & Regulatory Oversight

by Nick Charney RSS / cpsrenewalFacebook / cpsrenewalLinkedIn / Nick Charneytwitter / nickcharneygovloop / nickcharneyGoogle+ / nickcharney

The sharing economy is all the rage right now, businesses built to enable collaborative consumption are cropping up everywhere. If you aren't yet familiar with the sharing economy, here’s a video primer courtesy of Rachel Botsman:

While much of the enabling technology underpinning the sharing economy may be new, it’s somewhat of a step backwards in terms of economics in that it is a return to peer-to-peer exchange enabled by the Internet. At its core the sharing economy is about unlocking the value in idle products and services by more directly connecting supply to demand, making it disruption innovation par excellence in that it offers consumers 'less with less' (e.g. why own a car when you can share one?).

The fact that collaborative consumption is often referred to as a 'movement' is noteworthy 

Proponents frequently invoke the narrative of individual empowerment and a return to a more humane economy built on trust and personal relationships, more of this from Botsman:

"When we get it right, reputation capital could create a massive positive disruption in who has power, trust and influence" - Rachel Botsman, The currency of the new economy is trust (embedded above)
But can trust can effectively replace regulatory oversight? To be honest, I'm not sure these are emerging and disruptive markets. People’s adoption of services like Uber and Airbnb seem to be indicative that the general public thinks it can, or at least that they are willing to make certain trade-offs that perhaps they weren't willing to make prior to the Internet. That said, both Airbnb and Uber have faced significant regulatory pressures (See:  Hotels girding for a fight against Airbnb & Lessons From Uber: Why Innovation And Regulation Don't Mix).

But they aren't alone, disruption generally seems to attract regulatory interest

Ask the folks at Tesla about having to deal with rent-seekers or the people behind Bitcoin about being called before the financial regulators in the United States.

But why is this the case?

Broadly speaking, regulation has been used to correct market failures and/or create a series of concessions deemed to be in the public interest. By its very nature regulation distorts markets and in so doing inadvertently creates favourable conditions for incumbents and creates barriers to entry. Regulation can easily be adjusted to reflect sustaining innovations but struggle when asked to balance the potential benefits of disruptive innovation and the public interest. This likely happens for a number of reasons:
  1. Governments may lack expertise in the science of innovation and fail to distinguish the difference between disruptive and sustaining innovations. Even if they do distinguish them from one another, they decide to treat them as the same regardless, often in the interest of ‘fairness’ or (even more ironically) 'not picking winners'.
  2. Governments are faced with information asymmetry; they have a rich history and reams of data to support their existing regulatory regimes but nothing comparable for new entrants, so there is a propensity to inflate the risk and use exceptions to prove the rule.
  3. Government interests are likely to be better served by incumbents (at least in the short term) than by disruptive new entrants. Incumbents provide steady employment, generate higher tax revenues and have already made concessions for the public good. Disruptive firms often employee fewer people, generate fewer tax revenues (or create economies that avoid taxation altogether) and view regulation as a barrier.
  4. Governments have to contend with the concerted efforts of the incumbent lobby while new entrants who don’t have the resources to lobby are forced to try to amplify public support of their businesses. 

What's the remedy?

I get the sense that governments are facing something akin to what Douglas Rushkoff refers to as ‘present shock’ in that in these particular instances governments are unable to learn from the past or see into the future in a meaningful way because they are caught up by the immediacy of their surroundings (points 1-4 above).

If this is in fact the case, then governments may consider accepting short term trade-offs in unregulated markets and investing in the long game whenever they notice that disruptive entrants are offering consumers 'less for less'. Given the circumstances, what other options do they have?

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