Should Internet companies like Uber and Airbnb be regulated?

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Should Internet companies like Uber and Airbnb be regulated?

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Should Uber and Airbnb be regulated? As a matter of fact, these companies, like any other in the United States, need to comply with a large number of regulations that cover for example workers compensation and health care. But should Uber and Airbnb be regulated for the price they charge to consumers or to limit these companies expansion? This is a different question.

Companies like Uber and Airbnb disrupt normal business for incumbents, which are in these specific cases existing taxi companies and hotels. The rise Uber and Airbnb was brought by new and better technologies that displace old technologies which rapidly become outdated. This process is referred to by some economists as “creative destruction,” a concept associated to the economist Joseph Schumpeter. Sometimes, the arrival of new technologies is so sudden and has such an important effect on the market that some will call for regulation of entrants. Much of the calls for regulation are motivated by the redistribution of surplus from the incumbents to the entrants.

From an economic standpoint, regulation is justified if markets do not work properly. There are typically three types of market failures for which economists will agree justify some form of regulation to control market practices: 1) public goods, 2) externalities and 3) market power. Public goods and externalities are not a problem in the case of Uber and Airbnb. However, market power is a possible market failure. But, the markets in which Uber and Airbnb operate are heavily contested because entry is relatively easy. If Uber and Airbnb are able to acquire some market power and use that market power to capture surplus from consumers, new firms will rapidly enter and restore an equilibrium where firms are competitive.

Most economists will say that the arrival of companies like Uber and Airbnb is good for the economy. These firms bring more efficiencies in the market place thus reducing costs and lowering prices to consumers. Nothing specific to these firms calls for regulation.

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Last updated on April 29, 2016