Internet companies, often referred to as over-the-top (OTT) firms, are powering the new founded paradigm of “sharing economies” around the world. Two Sided Markets and associated Platforms (2SMP) form the basis of operation of these firms. The OTT platform connects one set of users (i.e. sellers) with another set of users (i.e. buyers).

These firms and their apps are fuelling the so-called “app economy”. As per Developer Economics, the economic impact of the app economy has been significant and is estimated to be reach about $143 billion worldwide by 2016.

This excludes the core e-commerce value-add and the associated spill-over effects in transportation, logistics, and other areas.

We analyse what these OTT firms are doing differently compared to the extant businesses and the associated regulatory implications.

WhatsApp advantage First, by playing a technology based intermediation role, the 2SMP firms decrease search cost for the users on either side of their platform. In an unorganised market, search costs are often very high.

Even in a relatively organised market such as in the US, the taxi sectors suffers from high search costs and Uber through its platform based approach, minimises the search costs for both cab seekers and drivers to find each other. Our own backyard is filled with firms such as Ola, Practo, JustDial and so on.

Second, the Internet acts as a leveller, reducing the cost of transportation of bits due its inherent packet technologies and its non-facility (as opposed to telecom which is based on infrastructure) based architecture. So, while an SMS can cost you 10-30 paise, an equivalent WhatsApp message costs less than a paisa. Hence the reasons for WhatsApp handling more than 30 billion message each day, about 50 per cent of the global SMSs.

Third, the 2SMPs provide a way for either side users to connect with each other directly (peer-to-peer), thus reducing intermediation. In emerging countries, it is well known that intermediaries appropriate huge rents on each transaction between the two sets of users and thus reduce public benefits.

An example is the still-alive that connects home buyers with sellers directly, possibly dis-intermediating the real estate agents.

However, the moot question is, during this process, if they bypass extant regulation, what should the policy response be? Should the extant regulation be applicable, which, in effect, might increase search and operations cost and reduce associated benefits?

Policy issuesRegulatory arbitrage : Since the technologies and business models of these 2SMPs are often evolving and not completely understood, regulations have always lagged behind. Hence the regulatory arbitrage that these firms often enjoy.

The recent case in point is the case filed by the Retailers Association of India against Amazon for issuing gift cards directly to its consumers (i.e. a B2C transaction) that violates FDI rules as Amazon is registered in India as a B2B market place.

Market power : Researchers have argued that such platforms tend to get commoditised and the winner-take-all nature of these platforms might lead to monopolisation or cartels in the market place. Excessive market power can threaten consumer welfare. Hence regulatory oversight and ‘significant market power’ assessment is needed to avoid predatory pricing, cartelisation, and abuse of dominant power. While these are still early days in most industries, the trend is evident from the antitrust charges being pursued by EU against Google.

Discrimination : When firms in 2SMP aspire to become monopolies, they might engage in discrimination against either sets of users due to economic, political and personal reasons. There are cases in the US against Uber drivers for exhibiting such discriminatory behaviour, especially against blacks.

Should there be regulatory oversight against such possible discrimination? Or can we expect that responsible companies will use the data available to them to actually root out such practices?

Liability : Though firms in this space use the caveat of “technology providers” to reduce their liability, there are a set of minimum liability and responsibility clauses that the firms need to adhere to.

For example, if the food delivered by a platform provider arrives spoiled, who should be liable — the entity which who delivered it (maybe a third party logistics company engaged by the platform), the enabler of the service (i.e. platform) or the one who produced it (i.e. the seller)?

Today, most 2SMPs do provide reasonable options for returns and refunds in the case of deficient products or poor delivery service, but there are situations where the liability could and should extend beyond just a refund.

The 2SMPs in different areas seem to have generated consumer surplus, mitigated day-to-day problems of common citizens, reduced the information asymmetry problems and hence the appropriation of rents, provided better job opportunities for blue collar workers and those at the bottom of the pyramid.

Light touch regulation Since social benefits tend to be higher, the 2SMPs should be treated with light touch regulation. A subset of existing rules should be defined as the mandatory rules.

There should be no regulatory arbitrage. For example, if taxi cabs need to run only on environmental- friendly Liquefied Petroleum Gas (LPG), the rule should be equally applicable to those recruited by the taxi cab aggregator such as Ola Cabs, as was correctly ordered by the Delhi High Court. For example, the 2015-16 Union Budget effectively brought taxi aggregators (whether based in India or outside) under the same service tax rules as radio taxi operators.

These are not problems unique to India. For example, Flywheel, an app for booking regular taxis, got the green light from California regulators recently to offer its “TaxiOS” technology to cab owners to replace the current, outdated jumble of meters, dispatch, advertising, navigation systems, and credit card readers. As Flywheel puts it, “California has finally set a level playing field for taxis in their war against Uber.” From a regulatory standpoint, this is a better approach than adding stifling regulations on a novel and evolving industry.

While there appears to be some convergence on regulations for transportation services and general e-commerce, there are other industries where there are significant challenges in working out the contours of regulations, trying to balance public benefits, business growth and the need for control. Online pharmacies and marketplaces are a case in point. It is indeed interesting times ahead for regulation of the app economy!

The writers teach at IIIT-Bangalore

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