United States: FTC Report On 'Sharing' Economy Highlights Business Issues And Potential Regulatory Concerns For Platforms, Buyers And Sellers

Last Updated: November 30 2016
Article by Gary Kibel

The Federal Trade Commission (FTC) has issued a four-part, 100-page report examining peer-to-peer platforms such as Uber, Lyft and Airbnb, which many refer to as the "sharing" economy. The report addresses these kinds of Internet- and app-based services, highlights their competitive benefits, and explores the consumer protection "challenges" facing the FTC and other regulators. The sharing economy is at the intersection of many issues previously raised by the FTC, including big data, privacy and the "Internet of Things." Click here and here to read previous D&G Alerts on FTC reports in these areas.

Background

In June 2015, the FTC held a public workshop that examined competition, consumer protection and the economic issues arising from sharing economy activity. The FTC also issued a request for comments and received over 2,000 public comments in response.

The new FTC report describes and summarizes the ideas and issues discussed at the workshop and the comments the FTC received. The first part of the report focuses on the economics of sharing economy marketplaces, particularly how these platforms use technology to facilitate low-cost transacting among many small suppliers and buyers, as well as certain competition issues that may arise as sharing economy marketplaces mature.

Next, the report addresses technology-enabled trust mechanisms that platforms have implemented to give participants confidence that transactions will go smoothly.

The third portion of the report examines what governments should consider when thinking about regulating sharing economy platforms and suppliers.

The final section discusses the rise of short-term lodging and for-hire transportation services, the competition between platform-based suppliers and traditional businesses, and the debate over how regulators should respond.

The Economics

The report explains that a sharing economy marketplace involves three sets of players: the platform, which provides an online marketplace accessible by various Internet-connected digital communications devices; the buyers (also referred to as consumers, riders or renters); and the sellers (also referred to as suppliers, providers or hosts).

As is well recognized, a sharing economy platform may compete with other platforms to attract buyers and sellers as well as with traditional suppliers of goods and services similar to those sold over the platform. For example, Uber and Lyft compete with existing taxicab companies for riders, as well as with each other, for drivers and riders.

The report observes that the general economic questions raised by sharing economy platforms are not novel but that serious study of sharing economy platforms is largely in its early stages. Nonetheless, the report suggests that platforms can succeed by providing thick marketplaces (where participants have a substantial number of potential matches on the other side of the market), effective and inexpensive searching and matching mechanisms, and mechanisms so that buyers and sellers feel confident that their transaction will proceed as agreed.

The report points out that, as sharing economy marketplaces evolve, competition issues may arise relating, for example, to the potential for platform dominance and the effects on market concentration and platform entry.

Trust Mechanisms

Next, the FTC report discusses "trust mechanisms" such as reputation rating systems or money-back guarantees that can help provide confidence that a transaction will proceed as agreed online. It notes that the features of reputation ratings systems on sharing economy platforms include the opportunity for both buyers and sellers to rate one another, the opportunity to rate along different dimensions of a product, and safeguards against user manipulation through fake reviews.

The FTC report says that there was a general consensus among workshop participants that, although reputation ratings systems do not eliminate buyer or seller dissatisfaction, they work "well enough to have facilitated the enormous growth of the sharing economy." The report also notes the general view that reputation ratings systems "do not function perfectly." It explains that reputation ratings may:

  • Be biased upward because platform users tend to leave positive feedback or no feedback at all rather than leave negative feedback;
  • Be biased toward extreme experiences because users may be more likely to take the time to leave feedback if they have a particularly positive or negative experience with a transaction partner;
  • Be misleading because users may act strategically by leaving fake reviews, or be reluctant to criticize a person they have dealt with directly, such as a host on Airbnb; and
  • Not accurately reflect a user's quality if the user is just starting out on the platform or planning to exit the platform soon.

Regulation

The third part of the report focuses on the "challenge" of regulating sharing economy platforms and suppliers.

The report acknowledges that the disruptive innovation introduced by sharing economy platforms can greatly benefit consumers, and it declares that regulators should avoid imposing unnecessary regulatory burdens that could prevent or impede their success. On the other hand, it adds, appropriately tailored regulatory measures may help protect consumers, promote public safety and meet other legitimate public goals.

It also points out that there are privacy concerns that arise in the sharing economy, stemming from the large amounts of information platforms assemble, particularly about participants and their transactions. The report specifically notes that the FTC's authority under Section 5 of the FTC Act applies to the sharing economy and allows the FTC to address various consumer protection and privacy concerns.

The report suggests that regulators should impose requirements only when there is evidence that regulation is needed to protect consumers and the public or to serve some other legitimate public goal. Moreover, the report cites to the FTC's opinion that regulatory actions should be tailored so that they are no more restrictive than necessary to serve those goals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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