The argument of this paper – which can be found here – is straightforward: scholarship about the platform economy has been ahistorical; focusing on the immediacy and novelty of the platform economy misses the fact that its interaction with the legal system does not raise fundamentally new questions from a law and policy perspective. From a business or economic perspective, history is full of technological and management advances that fundamentally disrupted business models over a brief period of time.
This is not to say that current developments do not pose challenges to public policy. Regulatory policy generally—even necessarily—presumes a certain kind of organizational model for the activities that it regulates. When business innovation upends that pre-existing model, the result is a disjunction between the structure of the regulatory system and the industry that is being regulated: a policy disruption. This has occurred in the past. Debates over whether and how the regulatory system should adjust to the rise of platforms are not fundamentally new at all – instead, they mirror previous debates on how to update regulatory structures in the light of significant business developments.
The paper is structured as follows:
- Part I provides a primer on business innovation theory and how it is relevant for policy design. The authors distinguish between disruptive business innovation and policy disruption, and show that one does not always follow from the other. The analysis starts with an analysis of business disruption. It observes that new technologies and new forms of business organization often go hand-in-hand, as a result of the impact of technological development on the economics of the firm. On this, they rely on the transaction costs analysis of Coase’s theory of the firm. But this does not mean that the new business model is disruptive. On disruption, the authors rely on Christensen’s much used (and abused) theory. In short, “the takeaway message is this: from Coase to the present debate sparked by Christensen’s criteria for disruptive innovation, the common thread in business theory is that meaningful business innovation—the kind with ample potential to rattle the incumbent firms in an industry—often involves the potent combination of a novel (to the industry) form of business organization leveraging a breakthrough (to the industry) technology, though one or the other can fuel business disruption on its own”. To link business disruption with proposed regulatory reactions requires a theory of policy disruption – i.e. a framework for analysing how different forms of business innovation present distinct “types” of policy challenges. A first question is whether a particular form of business disruption changes the way in which the innovator interacts with the regulatory scheme compared to incumbent firms. If the answer to this question is yes, the second question is how business innovation disrupts the regulatory scheme.
At this point, the authors identify four pathways through which business innovation can lead to policy disruption: End-runs, Holes, Gaps, and Solutions, each of which requires a different regulatory response. End-runs occur when entrepreneurs decide to exploit ambiguous laws to argue that their business models escape existing regulatory frameworks. Holes occur when entrepreneurs decide to exploit legal loopholes which explicitly exempt the new business model from the regulatory scheme. Gaps can be observed when the business innovation threatening incumbent businesses creates a new policy problem for which no policy regime exists or which would require a novel and tenuous application of the existing regime’s statutory and regulatory scheme. Lastly, Solutions take place when business innovations solve problems that regulatory systems are designed to address.
Each pathway gives rise to different challenges. End-runs, Holes, and Gaps are mainly cases of potential regulatory under-inclusion. In each scenario, the policy disruption arises because the innovation is arguably or clearly subject to less restrictive regulation than the incumbent industry. End-runs require regulators to decide whether to argue that the existing regime actually does apply to the business innovation. Holes require a decision on whether to change the existing regime to remove the exemption into which the innovation fits. Gaps require a decision to be made about whether to create a new regime or to develop new interpretation of an existing regime. On the other hand, maintaining the regulatory status quo if Solutions are developed could over-regulate a business innovation and impede its market penetration. Thus, solutions may lead to new regulations covering the innovation, or to revising the existing regulations covering the incumbent industry.
- Part II moves from theory to practice, and looks at case studies about the regulation of franchising and energy production. The case studies provide an overview of developments in these industries, for those interested in them. Relevant for our purposes here, each case study is supposed to reveal basic lessons about when and how business innovation has led to policy disruption (gaps and holes in the case of energy production, gaps in franchising), demonstrating the recurring nature of this problem.
- Part III develops a theoretical framework for the regulation of innovative business models. In short, there are four types of possible regulatory reactions. The regulator may choose to prevent the innovator from entering the market (Block), preserve the existing regulatory structure (OldReg), develop new regulatory structures that match the new business structure (NewReg), or allow the disruptive innovation to proceed without updating the regulatory structure (Free Pass). Choosing among these strategies depends fundamentally on the legitimacy and continuing relevance of the existing regulatory structure.
One way to choose the appropriate regulatory response is to rely on the principle of organizational neutrality. A principle of organizational neutrality would force regulators to focus not on the form of business but on its substance, and on how that substance interacts with important policy goals. In colloquial terms, the neutrality principle dictates that entrepreneurs should neither be penalized nor subsidized for their choices about how to organize their business in order to promote innovation and efficient use of resources. In an ideal world, neutrality would offer a level playing field between incumbents, innovators of today, and the innovators of the future. This approach ensures that customers are not deprived of the potential benefits of innovation by regulatory systems that screen out new business models.
Taking this into account, the authors propose a three-step analysis for managing policy disruption: (i) regulators should measure existing rules against the default principle of organizational neutrality to ask whether they privilege existing forms of business organization over innovative business models. If existing rules cannot be interpreted in a neutral way, it may be necessary to rethink the regulatory regime; (ii) while organizational neutrality should operate as a default rule, there may be compelling reasons in particular cases to override it, and instead prefer certain types of business organization over others. Regulators should ask whether any relevant factors warrant deviation from a neutral default; (iii) regulators should ask whether any reliance interests in the existing regime should be addressed, and if so, whether they could be addressed through alternative legal mechanisms designed to protect people from being unfairly harmed by legal transitions.
- Part IV then applies this framework to the challenges posed by the rise of distributed generation and Tesla’s efforts to sell its electric vehicles directly to customers.
Comment: This is an interesting paper, but I add it here because it emphasises one thing I’ve been hammering about in prior posts. There is a regulatory dimension to the current antitrust debate on how to deal with the digital economy. Part of the push for antitrust intervention in this area is related to the absence of good (or plausible) alternative regulatory initiatives that address the challenges raised by these news entities and their business models. Instead of focusing solely on the challenges to the internal structure of antitrust posed by online platforms – which, as noted repeatedly, exist and are substantial –, policy makers need to be able to look at the matter holistically. This requires engaging with theory of regulation more widely, as this paper does.