Making sense of the Uber economy – 2 – Competition vs. monopolies

Photo François Meunier / President, Alsis Conseil, Associate Professor of Finance, ENSAE ParisTech / September 23rd, 2015

From the perspective of an economist, the sharing economy can be described as a market expansion. Among the downsides, which are now well identified, competition is stronger: but is it still fair competition? And don't the marketplaces that organize this competition find themselves in a situation of monopoly?

When you pay for a hotel room, you don’t just buy the use of a mattress and blankets. You also pay for a guarantee of safety and hygiene, the attention of a trained staff, etc. You pay the cost of regulatory supervision, and therefore, for the inspection body that monitors the quality of hotel providers. You pay the cost of taxes that affect the whole production chain, VAT, taxes on the company, etc. The staff at your service enjoys some guarantees too, and pays taxes and social security contributions. The Uber economy raises a threefold question, on regulations, on taxation and labor law. Its economic successes should not come from its ability to circumvent taxes, standards and laws.

Any regulation, and that’s true of law in general, can only follow reality: it observes the phenomenon and takes actions accordingly to avoid or spare compensation for some damage contrary to specific or public interest. No regulation is able to anticipate all future configurations, societies and economies evolve largely as they please, very fortunately. The Uber economy forces governments to adapt their regulation. For example, the grading examination of Parisian taxi drivers requires to know by heart many street names in Paris – a city with 6,000 streets. In the era of GPS, this requirement is now futile and may represent a barrier for aspiring drivers.

If an Uberpop driver drives more than x hours, he will no longer be considered as an intermittent employee but as a professional who therefore needs a license. Either we remove all licenses to make public transport, a choice very few people are willing to support. Or, the regulation must adapt, keeping in mind that collective benefits must outweigh costs (especially by erecting barriers to entry that promote unearned income). Regulation shouldn’t protect the successes of the past against technical innovation. Mutation can be painful for some, especially for workers who are already on the field, but it uses another feature of the government than industrial regulation: solidarity and group insurance.

The Uber economy is not devoid of control and monitoring. This is actually the third defining feature of this new form of activity, and the true major societal innovation in regulation: centralized monitoring is replaced by decentralized monitoring through “cross-check”: users rate their Uber driver, Airbnb host, BlaBlaCar or Drivy. These, in return, rate you as a user or consumer. The reputation and trust involved are equally important, we will highlight their ambivalence below. But it can also be more automated mechanisms, enabled by new technologies. For example, the technical breakthrough in the monetary field of Bitcoin – an electronic currency not issued by a central bank – is not as much due to its dematerialized support in the cloud than to its control mechanism: instead of a central clearing house that checks the compliance of the transaction (we refer to paper money, the overwhelming majority of money in circulation), it is based on a fully decentralized control mechanism, using complex and computing-intensive algorithms, that checks each transaction for the complete history of transactions and thereby guarantees that the payer is really in possession of the money he claims to have. Central banks, including the Bank of England, are intrigued by, and even laudatory of this innovation.

But there is a problem on the side of taxation. In tax doctrine, one tradition is to never tax self-production or domestic production. When you repaint your kitchen or pick tomatoes in your vegetable garden, you close your eyes on the implicit income generated by self-production. The educational service you provide to your children escapes taxation, fortunately. This applies that even if you give a hand to your neighbor to paint their kitchen. The flow of support services is free of tax. More debatable because of the sums involved, when you use an accommodation, while being the owner of your flat, instead of renting it. Nobody ever complains about that. But it is a major grant made to owners because it helps prevent the access to wealth to low-income people, who remain trapped in the cycle of rent or social housing. We hardly deviate from our subject here: an important element of circular economy is to ensure economic neutrality between the rent of capital goods and their holding as full owners. The preference for home ownership, subsidized by the tax authorities, damages the “liquidity” of homes and their full use.

However, if one transforms the regular provision of service into a business, than you need to pay taxes or VAT according to the legal status under which you operate and the income tax on the balance. If the Uber economy were to undertake a major economic expansion, it would could also become a new source of state financing that could imply – let’s dream about this just a second – a reduction in the average tax rate of the overall economy. The Uber economy involves, potentially, an expansion of market economy and therefore, a wider tax base.

This leads to the question of employment. We will ignore the broader picture and focus only on the impact of innovation on employment. GoogleMaps hurts, obviously, the industry of traditional maps and the jobs involved. The answer to it will vary according to our degree of optimism when faced with technical progress.

But the Uber economy is not just about technological innovation. It is the field of choice for mini-jobs, without status, with no lasting protection, etc. The traditional segmentation of status between employees, retailers or craftsmen has disappeared. The legal ground is particularly unstable. A California court, for instance, forced Uber to grant the status of “employee,” with a labor contract, to its Uber (not Uberpop) drivers. This ruling has had an enormous impact, as often in the United States, because of the predominance of case law. Europe on the other hand generally resolves these cases with statute law. The government is therefore responsible for insuring that common legal protections will apply to these new activities.

And yet, the Uber economy has many shapes and developments and also includes non-profit activities that need to be preserved and therefore, it must allow for some flexibility in its statutes. The success of the “auto-entrepreneur” status in France or of the franchise agreement, can be seen as a forerunner, even if they represent a mild – and therefore tolerated – form of tax and regulatory discrimination against other types of status, such as craftsmen.

If there is any market where a good matching of supply and demand is crucial, it is the labor market. The role of employment agencies, for example, is to prevent the coexistence, for the same qualification, of a demand and a job simultaneously. Unemployment is partly a phenomenon of imbalance of information. The Internet tool (job centers, but also Monster.com or social networks such as Linkedin) can help, in a commercial or non-commercial way, correct this imbalance.

Note that to date, no website is, to my knowledge, offering to “share your job,” the same way you share a vehicle or an empty office. Subleasing employees is strictly forbidden in most countries, although HR managers are well aware that temporary work is often very similar. And yet, it would be easy to organize a marketplace where a company, with a temporary period of underload, could “lend” its technicians to another company facing a temporary spike in its order book. Labor productivity would increase and income could be shared (how?) between the mobile employee and the other company according to the original employment contract. But this would break a crucial feature in the employment contract: the clear identification of the compensations and working conditions (location, specific function, etc.) of the employee’s activity. We will very probably see an increase in litigation in this field in a near future.

The rise of new monopolies
The operator of the Uber economy is in the economic situation of an interface. It is the marketplace, an intermediary between customers on the demand side (something quite usual) and customers on the supply side (something less usual).

We can see that, this mode of competition, called bifacial competition by economists – following Jean Tirole, who has studied all aspects of the phenomenon – can easily create monopoly configurations that will generate significant annuity. The situation varies greatly between sectors of activity. For example, today, an intermediary cannot attain a dominant position in the field of the physical distribution of bandwidth flow. Internet service providers (ISPs) in the United States are calling loudly for the end of net neutrality. These operators ensure the intermediation between consumers and content producers (the press, the Walt Disney Company, but also with Google, in its search engine activities). But they still fail to capture the intermediation income, by introducing a pricing that would vary according to the bandwidth amplitude granted to the content producer. The Competition Authority in the US has rejected their calls for the end of Internet neutrality. But in other fields, the marketplace’s position is crucial to capture annuity. With its new iTunes service, Apple is fighting to catch up its delay for music on demand, a sector now dominated by Spotify and to a lesser extent in France, by Deezer. If Apple ever gets there, they will probably have the means to pay the two ends of the chain: the record label (and thus the artist), and the music lover.

Apple or Google aside, these new intermediaries such as Uber, Airbnb and Booking, will soon reach this position of bifacial monopoly. The reason is that they add to their specific services a strong scale effect related to the size of their network and especially, a reputation effect that the best “ISP” could barely dream of. Today, it is difficult to build a network that has the reputation of Uber or Booking. It’s a “winner takes it all” phenomenon where the first entrant into a market reaps all the benefits. Booking.com is about to consign hoteliers to a simple role of providing dormitory space, however sophisticated it may be. Customer relationship, marketing, rating, pricing negotiation, related providers (transport, leisure, food service): in short, the pairing of all these fields could slowly be devoured by the Internet marketplace. With the additional risk that this monopoly uses all of its power to block the initiatives of new entrants.

What complicates things is that all these potential monopolies, like the famous GAFA, come from California. A site as useful and as French-spirited as Lafourchette.com has recently been bought by the American Tripadvisor, thus increasing its grip on the market of tourist counseling (this will perhaps allow it to even attack Booking, through the recommendation of reservations). Just like in the United States, we are faced with a debate over the pros and cons of the Uber economy or, to put it simply, a debate between consumers vs jobs. But countries such as France, that are not naturally inclined to innovations in the field of competition, overlook the debate, thus ignoring the potential income related to this type of economy, which strongly irrigates centers of innovation such as the Silicon Valley.

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