IMPACT ON COMPETITION OF SHARING ECONOMY

18 de November 2015Raquel Tárrega López

The views and opinions expressed in this presentation are those of the author and do not necessarily reflect the official policy or position of the CNMC

CNMC and the new models for service delivery and

sharing economy

The National Commission for Markets and Competition (CNMC) launched in November 2014 a public consultation on the new models for service delivery and the “sharing economy”. The consultation took place in two stages and ended in January 2015:

• The first phase assessed the theoretical bases underlying traditional regulation of two of the industries where “sharing consumption” is having a large impact: passenger road transport (bus and taxi) and tourist accommodation.

• The second phase focused on (i) the effects of the new models for service delivery on these markets and (ii) the need and proportionality (in the sense of minimum competition distortion) of the current regulation, given the new market conditions.

These new services are both demanded by consumers and attacked by the incumbents and have posed significant challenges for the Regulator. The CNMC is currently conducting a study

on the new models for service delivery and sharing economy

Sharing Platforms: concept and origin

CONCEPT:

‘Sharing economy is an umbrella concept that encompasses several ICT developments and technologies, which endorse sharing consumption of goods and services through peer-to-peer platforms’.

Access to services and products is what drives consumers at present. This new consumer behavior could reflect a trend on:

• Increasing concerns about ecological and social issues• Emerging cultural values of convenience, empowerment, freedom and flexibility

associated with the concept of access, rather than ownership• Economic gains based on variety, innovation, lower prices, quality, etc.• The reduction of household income and of credit available to consumers

1. Access vs ownership: possibility to have access to goods, services and information that consumers could not have otherwise. Consumers can participate in lifestyle spaces that they could not access before and on a much lower price.

2. Economic gains: consumers are able to reduce expenses, such as searching costs, information asymmetries, transactional overhead and/or charged prices, and increasing convenience.

3. Sustainability: consumers are more sensitive to ecological sustainability concerns and communal values might prefer businesses that internalize such worries.

4. Offer idle resources: increasing overall efficiency and productivity.

5. More information on the asset or service available: it allows easy comparison between products and helps to make better consumption decisions.

6. Increase in the quantity and variety of supply (and innovation)

Sharing Platforms: advantages

1. Surveillance and customer data: access to customer data could be used by the platform to perfectly price discriminate. Under this scenario, market price would be well above the competitive market price.

2. Network Effects: participation becomes more attractive to each individual the more other individuals participate in the platform, and through improved opportunities to trade or interact with the other side of the market.

Network effects could lead to the creation of dominant players or monopolies which could force competitors to leave the market, and significantly increase prices. New entrants might find difficult to obtain a critical mass of users to boost network effects.

Sharing Platforms: main risks for competition

However, market power does not always occur in multi-sided sharing platforms:

1. Product differentiation2. Multi-homing3. Consumers’ coordination

Reputation System

The peer-to-peer mechanisms of building online trust and reputation in the sharing economy are centered on:

i. Establishing an identity

ii. Increasing communication and trust between peers Reputation is effective only if the testimonies are independent and free from collusion

or retaliation many reputation systems in sharing economy are biased, but still they increase transparency and the amount of information available.

Design criteria that can influence the manipulation of a reputation system:

1. Identity of feedback sources: Full anonymity and easy creation of virtual identities make it easy for certain users to flood a reputation system with fake ratings. But: monitoring identities could discourage users from joining the system and from posting anything but positive feedback.

2. Transparency of aggregation rules: Concealing the details of the algorithms used to aggregate feedback is another way of resisting possible manipulation. But: lack of transparency it could lessen the users’ trust in the reputation system’s fairness.

Regulation, Consumer Protection and Competition Policy Issues I

CNMC: ‘Public intervention in the economy through regulation finds its justification in the search for economic efficiency, and it only makes sense when a market is unable to achieve an efficient allocation of resources by itself.’

A market’s incapability to achieve an efficient equilibrium can be attributed to market failures. Can be grouped in four categories:

i. Non-competitive market structures (i.e. monopolies, oligopolies): lead to inefficiencies in the allocation of resources and market power. Elimination of unnecessary entry barriers.

ii. External effects not reflected in market prices: certain costs or economic benefits of transactions are not internalized. Incentives through regulation.

iii. Information problems: efficient regulation can reduce the problems linked to the lack of information in the market through, e.g. product quality or safety requirements

iv. Incomplete markets: markets fail to provide a good or service even though the cost of providing it is less than what individuals are willing to pay

A regulation is considered sound if: (i) it is necessary, in the sense that it is causally needed to palliate a market failure. (ii) it is proportionate, it has to be the most appropriate tool to achieve the objective of the regulation.

Sharing economy is is able to overcome some market imperfections without recourse to traditional forms of regulation.

SOLUTION:

Avoid rolling old regulatory regimes onto new technologies and sectors.

Better alternative is to level the playing field by “deregulating down” to put everyone on equal footing with necessary and proportionate regulation, not harming consumers by “regulating up” to achieve an ill defined parity.

Policymakers should review and modify obsolete rules on incumbents as new entrants and technologies challenge the status quo and serve the general interest.

Regulation, Consumer Protection and Competition Policy Issues II

Thank you!