The Wall Street Journal: Sharing Entrepreneurs Must Address Consumer Protection Issues

(Credit: Time)

(Credit: Time)

The only thing surprising about Airbnb's ugly confrontation with New York's Attorney General is that it took six years to get to this point. Despite operating in one of the most notoriously regulated fields, Airbnb has demonstrated an ability to expand at a mind-boggling scale. The star of the sharing economy has rapidly grown into the fifth largest hotel chain in the world.

This leads to the question, how is a company like Airbnb capable of managing the regulatory intricacies of offering listings in 33,000 cities? The disappointing answer is that they are not able to. Instead, they pass the legal headaches onto their hosts through the terms of service. This strategy has paid off handsomely for the company, but now some of its users are having to pay the cost in eviction, fines and lawsuits because they didn't realize they were breaking the law.

It's not just Airbnb, these tactics are used by other sharing economy companies to achieve rapid growth without having to fully deal with the consequences. Uber, for example, sees itself solely as a technology platform to connect you with independent contractors. If something goes wrong, it's not Uber's fault or responsibility.

However, as the industry matures, business practices are now coming under far greater scrutiny.

At the core of the philosophy behind the sharing economy is a belief that access is more valuable than ownership. In a few short years, this concept has proven to be powerful enough to change our deep-seeded consumption behaviors. This trade off, however, has led to the loss of traditional consumer protections that came with well-established businesses.

For an industry that claims to be built on trust, the companies that make up the sharing economy have adeptly avoided addressing these issues directly. When regulators have tried to bring up legitimate questions about safety and standards these companies have been quick to paint themselves as innovators under attack by special interests. In some cases this is true, in others it's just a distraction from a reasonable complaint.

In a way, the sharing economy provides its own alternative to traditional legal protections through reputation and ranking systems. The premise is that since we are constantly able to review the performance of each other, the bad actors will naturally get weeded out. In practice however, these systems can be opaque, their credibility varies and the enforcement is uneven. There are certainly advantages to real-time feedback that can benefit consumers, but first we need to recognize the void that these systems are actually filling.

One of the most powerful forces in getting a company in the sharing economy to improve its behavior has proven to be competition. These sharing economy companies are usually backed with large amounts of venture capital, which the companies then throw at their customers/app users through promotions or steep discounts, often in an unsustainable manner. Many of these markets are not yet consolidated. And because there are no clear winners yet, services continue to improve and promotions continue to be quite enticing. Unfortunately, this is bound to come to an end at some point.

If, say, Uber were to triumph over Lyft in the battle to control urban transportation, we would be stuck with their "surge pricing morality." We would be at the whim of Uber's management, forced to accept whatever changes or rate hikes they introduce, with little recourse. Since we didn't care enough to preserve the taxi industry that Uber had decimated, we would be left with few functional alternatives.

While some common-sense regulation could be helpful, we can't rely on our legislators alone. The complexities of technology-enabled micro-entrepreneurship are many. Just as well, we'd be ill-advised to continue believing that self-regulation will automatically resolve these problems. We will need efforts in both areas; but we also, as consumers, need to pressure these companies to act ethically and in our interest, to the greatest extent possible.  The tools of trust and reputation can work both ways.

It is possible for us to encourage the responsible development of this promising industry while still having the world at our fingertips.


Tarun Wadhwa