EconByte

 By Dr Justin Pyvis

Issue 8/2019

How regulation perpetuates monopolies

Economics blogger Scott Sumner, with whom I disagree on monetary policy (that’s a story for another day), brings up an important issue in a recent blog post. Namely, that the unintended consequence of regulations designed to help rideshare drivers is to solidify Uber’s status at the top of the food chain. Sumner writes:

“Soon after the ride sharing companies began breaking up the government-created taxi cartels, the regulators struck back by applying minimum wage laws to drivers—even though they are independent contractors… [But] how do we determine the number of hours worked? Is it hours spent in the car, or hours spent actually driving customers? The regulators opted for hours spent in the car. But many drivers work for more than one company—so who pays for the downtime? The regulators decided to split the cost evenly, a practice that favors Uber over its competitors.”

How do the regulations favour Uber over its smaller competitors? Citylab explains:

“Because Uber is bigger, drivers are most likely to be called to drive for them first. But all the dead time on the app counts against smaller companies like Lyft and Juno, even if drivers aren’t picking up rides…

According to Juno’s filing, the TLC tried to address this in a December revision to the rule by splitting the idle time evenly between each company. “Far from fixing the Rule’s flaws,” Juno wrote, “this new methodology exacerbates them by disproportionately harming companies like Juno”—a fairly new competitor in the market that relies on drivers already hooked on Uber and Lyft, but that offers more flexibility by freeing them from ride quotas.”

I’ve been critical of those seeking to regulate Facebook in the past, for precisely the same reasons. Regulations often help established workers, businesses and monopolists, as they are better equipped to design, comply and work with or around them. The losers are consumers, smaller competitors and yet-to-be-conceived market entrants.

Occupational licensing does not improve quality or public health and safety, but does raise prices for consumers and the wages of those who manage to enter licensed occupations, at the expense of other workers (~28% more, according to the Obama Administration’s report on the issue). Land use regulation increases house prices, benefitting those already in the market at the expense of renters and those considering home ownership. The following image is from recent Reserve Bank of Australia (RBA) research, which estimated that land use zoning restrictions adds ~$489,000 to the price of a detached house in Sydney in 2016, ~$324,000 in Melbourne, ~$159,000 in Brisbane and ~$206,000 in Perth (HT: The Conversation).

The cost of zoning in Australia

The cost of zoning in Sydney

The effect of land use zoning is the same everywhere in the world, with house prices most pronounced in places people want to live that also have the most intense artificial supply constraints (e.g. San Francisco, Boston, Sydney, Vancouver, Hong Kong… the list goes on).

The cost of zoning

Textbook (optimal) regulation can be good, but the political process rarely produces such outcomes. Regulation is designed and determined in political, not economic, markets. The likes of Uber and Facebook are not unchecked natural monopolies by any definition, but operate in a highly competitive market where no one’s longevity is guaranteed. As an article on the aptly-named “startupgrind” points out, “for every Facebook, Twitter, or Instagram, there’s a Friendster, Pownce, or Color Labs”.

Failed social media companies

If the experience of rideshare regulation above is anything to go by, the political system will more likely than not fail in its attempt to efficiently regulate Facebook or any other technology company currently operating in a competitive market. But that’s not even the biggest problem with regulating technology companies.

As with the rideshare case above, if (when?) unintended consequences rear their ugly heads, regulators will be obliged to fix them with - you guessed it - more regulation, which may create further unintended consequences, requiring …you get the idea. Once an industry is regulated, it becomes incredibly difficult to unwind that regulation given the interests that will grow under the new regime and the political forces that work to keep them in place.

My point is that even if there were some “optimal regulation” that could be applied to Facebook (and others) that would move the sector towards something more closely resembling a textbook version of a perfectly competitive world, we should err on the side of caution. The technology sector is already highly competitive, meaning any social gains - even from optimal regulation - would likely be small. However, the costs of getting it wrong could be enormously high, making everyone worse off than if there had been no regulation in the first place.

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How regulation perpetuates monopolies was compiled by Dr Justin Pyvis. Feel free to send feedback, suggestions for future issues, ideas, insults, or pretty much anything that crosses your mind to his Keybase chat.