Don’t we want their help?

Published 10:27 pm Wednesday, December 17, 2014

I would think that we should celebrate startup businesses using technology and new ideas to lower the cost of services and create new high paying jobs. Yet startups like Uber, Lyft, and Airbnb have run into numerous legal and regulatory hurdles across the nation. Birmingham and Tuscaloosa recently joined the list of cities blocking Uber.

First, some background. Uber and Lyft offer ride sharing services, while Airbnb rents out rooms, apartments, or houses not being used by the owners. Drivers for Uber or Lyft use their personal cars to chauffer paying riders. All three companies are less than a decade old and connect customers to providers using social media, and are part of the new sharing economy. Technology will likely open even more methods of beneficial sharing in the future.

Uber and Lyft essentially provide taxi services, while Airbnb offers lodging, and these companies have run afoul of laws governing taxis and hotels. Birmingham and Tuscaloosa didn’t actually ban Uber, but decided that it must comply with taxi regulations. Uber believes such requirements are too onerous for its business model of using peoples’ cars instead of a fleet of dedicated cabs.

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The legal wrangling raises questions about when regulations should apply to activities most of us engage in, and the need for such burdensome regulations altogether. Most of us have let friends or family stay with us on visits, or shared rides with others, perhaps to or from college. Should these activities fall under hotel and taxi regulation? Should a babysitter have to comply with daycare center regulations?

Information costs provide the economic case for regulation of taxi and lodging services. Most people find it difficult and costly to determine the safety of a car, whether a room is sanitary, or if a business is properly insured. And violent criminals posing as taxi drivers could lure unsuspecting customers into highly dangerous situations. Economists refer to the challenges posed by such information issues as the quality assurance problem.

Markets successfully assure quality in numerous ways. The most prominent involves brand names and reputation. Brands allow us to respond effectively to poor quality; if you are unhappy with your stay at a Holiday Inn, choose another brand for your next trip. The desire for repeat business gives hotels an incentive to ensure that its services are as good as advertised.

Reputation works less well for infrequently purchased goods and services, because businesses do not expect repeat sales. Consequently, government regulation may be helpful for services primarily purchased by travelers, including taxis and hotels. And brands and reputation can create information overload for consumers. For instance, we might not remember the name of the reliable local taxi company when we’re in Atlanta.

Technology is making reputation even more effective, and these startups are on the cutting edge of this process. Riders can leave feedback for Uber and Lyft drivers using an app, and the companies will drop drivers who receive too many bad reviews. Customers can see reviews for specific units on Airbnb. Amazon Marketplace and EBay have extended reputation to thousands of sellers we purchase from only once. Technology allows easy access to the reviews, overcoming our memory as a limit on reputation. Furthermore, Uber, Lyft and Airbnb, by providing a platform for otherwise independent transactions, have created a way to profit from their brands, just as Holiday Inn did decades ago by establishing a nationwide chain of hotels.

Markets assure quality very effectively for many goods and services, so we should look to regulation only in specific cases where market forces work poorly.

The potential for the misuse of government’s regulatory powers, a topic I will return to in the future, strengthens the case for regulation as a backstop and only when truly necessary. In general I think many people are too quick to pronounce old ways of doing things obsolete due to new technology.

But as technology strengthens the force of reputation, businesses should have every opportunity to render government regulations obsolete.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at and like the Johnson Center on Facebook.



About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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