The need for regulation in e-commerce

In an earlier post I had raised the issue of how internet firms benefit from regulatory arbitrage. The competitive advantage of the sharing economy firms over their brick and mortar counterparts can be traced to their very low regulatory compliance costs, in terms of entry standards, labor protections and different categories of taxes. 

It was not that any of the externalities from such activities disappeared. But instead of being internalised, as with the case of brick and mortar enterprises, they were socialised away from the internet firm and borne by the tax payers. 

Consider two features of the ride-on-demand (RoD) market in India as against developed markets. One, unlike the US and developed countries where Uber drivers complement their incomes, those in India are largely full-time workers. Second, instead of enabling a more optimal utilisation of an already owned vehicle, Uber drivers here either lease or purchase vehicles or are doing part time with (mostly) informal taxi operators. 

Both these features mean that RoD market in India is not the classic "sharing" economy. In fact, they are often indistinguishable from a regular business with employees and a management. The only difference between a registered taxi operator and Uber is that the former pays all the taxes and adheres to all regulatory compliances. Uber, Ola and Co manage to shift the entire burden away to the tax payers. By using drivers who work for informal taxi operators, likely to be one of the largest categories of drivers, RoD firms are formally leveraging an informal economy platform. 

And the regulatory vacuum encourages perverse incentives,

In India, Uber leases vehicles to drivers through Xchange Leasing — a challenging proposition in a country with no centralised credit score system. “To us, creditworthiness is not a criteria, our goal is to give out leases and give out cars to as many people as possible,” says Amit Jain, president of Uber India. Several thousand cars have been leased through the programme, he said, which uses background checks rather than traditional credit checks. “If somebody cannot pay the monthly amount, they can simply return the car,” he added.

Don't be surprised if a significant portion of those "subsidised" Mudra loans, which the government is promoting to encourage entrepreneurship, is ending up financing Uber and Ola's expansion. And the risk is that when the powder runs short, as it should, and the price sensitive Indian customers inevitably retreat when prices rise to reflect commercial considerations and likely forthcoming regulatory burdens, these loans could end up adding to the already big pile of non-performing assets. 

What is happening in large parts of the e-commerce market is resource misallocation on a fairly significant scale. This is true as much of the so-called "sharing" firms like Uber/Ola and Oyo, as of the broader e-commerce market itself. Amidst this euphoria over start-ups and me-too firms, with their undoubted entrepreneurship (starting and doing a business of any kind in India requires some entrepreneurship!), I struggle to spot the fundamental rationale, innovation.

In this context, greater regulation assume significance. The problem when governments do regulation is that they tend to be excessive. But the problem with no regulation may be worse still!