Ministers, the business community, civil society, labour and the Internet technical community will gather in Cancún, Mexico on 21-23 June for an OECD Ministerial Meeting on the Digital Economy: Innovation, Growth and Social Prosperity. Today’s post is by Antonio Maudes, Director, Maria Sobrino, Head of Market Studies Unit, and Pedro Hinojo, executive adviser in the Advocacy Department of Spain’s National Authority for Markets and Competition (CNMC)
The June 2016 OECD Ministerial Meeting on the Digital Economy in Cancun, Mexico will feature high-level discussions that will help to shape the current debate and present new ideas and perspectives for the participants regarding online platforms. Opportunities coming from online platforms not only create innovative forms of production, consumption, collaboration and sharing between individuals and organisations, but also promote economic benefits and employment opportunities thanks to the digital economy by creating a fast-moving business environment.
But, what is the “sharing economy”? Finding a precise definition is both challenging and controversial. The CNMC, the Spanish Competition Authority, has approached this phenomenon through a public consultation (launched on November 2014, with a first and a second stage), achieving some preliminary findings, which were submitted to public consultation too. The results of the latter consultation point out that competition authorities, regulators, consumer organizations and universities tend to perceive the sharing economy as an opportunity to improve social welfare, regulation and competition while unions and freelancers had a somewhat negative view.
After more than one year of intense work, the CNMC has gained knowledge about these new models of service delivery in the digital economy. One of the defining features of the sharing economy is the use of underutilised assets and goods, be it in exchange of other resources (money or other goods or services) or for free. But this is not new: houses, cars and other durable goods have always been exchanged and shared (among relatives, friends, colleagues…). The novelty is the scale of the current wave of sharing economy, overcoming transactions costs and informational asymmetries.
This has been made possible thanks to technological and social transformations, somehow intertwined:
- On the technology side, the “21st century sharing economy” relies on internet platforms in multi-sided markets, which slash transaction costs by matching supply and demand more efficiently. The IT revolution, chiefly smartphones and apps, allows us to find new services or providers thereof very conveniently. Competition is not one ‘click’ away, it is even closer. Competition is actually one ‘swipe’ away. It is at our own hands, every day, every time.
- On the social sphere, people are showing how they are willing to concede anonymity in order to enjoy the sense of belonging to a community and building trust among a wider network, thus sharing goods and services within platforms. The voluntary revelation online of the “real world” identity helps to reduce information asymmetries, facilitating markets and transactions.
This is, without a shadow of a doubt, a structural, unstoppable and disruptive revolution. A fourth sector is emerging, not falling under any of the traditional three classifications (primary-agriculture, secondary-industry, tertiary-services).
In this digital economy, the consumer is more empowered, with access to a wider variety of goods and services and higher quality at lower costs and more efficient prices. The user receives more information, more comparable and reliable, as shown by reputation mechanisms. And consumers can even be producers, offering their goods and assets as services. In a nutshell, a new economic agent is born: the “prosumer”, who can participate in both sides of the market. And this empowerment of the prosumer, along with market entry for new players, is the main reason why the CNMC, as a competition authority, welcomes these new models of service delivery within the sharing economy.
This “permissionless” innovation can foster competition by challenging the status quo in some sectors traditionally shielded from competition. The absence of competitive pressure was in many cases provoked by inefficient regulations which made entry more difficult (if not virtually impossible), as well as market failures such as information asymmetry. Paradoxically, new business models overcome technological obstacles while responding to these market failures more efficiently than traditional incumbents (for instance, through online reviews and reputation mechanisms), question the rationale for distortive regulation.
Other benefits of the sharing economy can be felt beyond the scope of competition:
- Economic development, fostered by the innovative and technological dimension of these new business models.
- Environmental sustainability, as the circular economy emphasizes access and service provision rather than at ownership and goods production. Indeed, one of the reasons behind the thriving of the sharing economy, apart from the technological and social transformations already mentioned, is increasing environmental awareness.
- Redistribution of resources towards low-middle income citizens, which can monetise some illiquid under-utilised assets (in order to smooth their consumption over the cycle) while accessing some goods and services at lower prices.
- Better contribution than traditional business models to other general goals, like consumer protection or tax compliance, due to the electronic tracking of transactions and, consequently, greater transparency.
Therefore, the role of public policy is to embrace these new models in order to increase general welfare. The CNMC preliminary findings on the new business models and the sharing economy” advise governments to take advantage of this opportunity to revise the existing sectoral regulation according to the efficient regulation principles (necessity, appropriateness, proportionality). The fact of dealing with multi-sided markets implies that the platform has to balance at the same time the interest of both producers and consumers. This reduces the risk of a “race to the bottom” in terms of quality standards given that if consumers don’t perceive adequate guarantees, they can switch to another platform or not fulfil the transaction. Reforms in horizontal regulation (for instance, in the areas of tax and labour compliance) might also be warranted in order to ensure its adaptation to a new and more flexible economic reality.
The OECD, with its rich history of dialogue and analysis, is the perfect setting to shape the digital economy and the future of the new services’ economy.