Kevin Werbach Shares Lessons for Policymakers: How to Regulate Innovation without Killing It

By TAP Staff Blogger

Posted on February 24, 2017


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The next stage in the evolution of the digital economy involves the creation of what can be called the “Internet of the World.” Wharton School of Business professor Kevin Werbach explains this phenomenon as the intersection of three highly visible trends in digital innovation: the On-Demand Economy, the Internet of Things, and Big Data. “Together they mark a global sea-change that will penetrate every sector of the economy,” says Professor Werbach.

 

Digital innovation sparks new business models and processes; however, regulatory oversight does not always evolve as quickly as technological change. In his new policy paper, “Lessons for Policymakers and Regulators on the (Predictable) Future of the Digital Economy,” Professor Werbach offers suggestions for regulators and business innovators on how to provide regulations and business frameworks that support digital innovation, rather than stifle it.

 

Professor Werbach was recently interviewed by Knowledge@Wharton about his new policy brief, “Lessons for Policymakers and Regulators on the (Predictable) Future of the Digital Economy.”

 
 

 

Below are excerpts from this interview.

 

New Rules for the Digital World?

We tend to assume that there is one set of rules for the real world, and there’s one set of rules for the digital world, and that’s a mistake because, increasingly, there is just the world. Software technology, networks, all these trends, and what I call the Internet of the World are affecting everything. So that’s the first piece: the assumption that we can just ignore the rules of the physical world because we need totally new rules for the digital world.

 

The larger issue, though, is this question of innovation and regulation. And again, there’s this common assumption that innovation needs to thrive with no regulation, and any time government gets involved, that’s a check and a drain and a block on innovation — and that’s not really the case.

 

What I talk about in the article you referenced and the larger law review article it’s based on, is that if you go and look at the history of how the internet developed, how electronic commerce developed in the 1990s, a surprising amount of the time it was government action actually facilitating innovation, and the emerging startups actually pushing for that government intervention to help create a more innovative marketplace.

 

Skype and Uber Started Outside the Law

The Skype and Uber comparison is basically that both of them were companies that when they started were illegal in most jurisdictions. Skype — the very popular internet communications service, originally voice calling, now also video and messaging and so forth, [and] now owned by Microsoft — was illegal in most of the world when it launched because there were rules saying you could not do a communications service, a telephone service, outside of the existing regulatory infrastructure.

 

In the U.S., because of what we did — I was at the Federal Communications Commission in the 1990s when we had to think about voice over IP (Internet Protocol) — we very deliberately left open the door. Even though things like Skype were outside of the regulatory structure, we made a conscious decision to allow them to develop. And that’s an example of regulators consciously deciding not to impose a whole set of rules early on — when these were nascent technologies — allowing them to grow.

 

Uber is similar. Uber is illegal in most of the cities where it operates. And the story of Skype, I think, is a hopeful story. What happened with Skype is that first of all, you had regulators like the FCC in the U.S. that understood these new internet calling technologies were … a way to lower prices and create better service, and [provide] new services and innovation, and so that we shouldn’t rush to impose all the traditional rules on them. And as these companies grew, they were able to work with regulators to address the rules that were necessary.

 

Algorithms and Antitrust

What we’re seeing now with these next-generation platforms, these on-demand platforms, is a new twist... Companies like Uber and Airbnb are built on algorithms. They’re built on software that understands supply and demand and matches people on both sides of the network. And again, that’s a tremendous boon for competition and innovation. I’m not saying it’s bad, by any means, but it does put the platform owner in a position of unimaginable control.

 

How do you know that what you are paying for that Uber ride is the efficient price? Uber says, “Well, by definition, it’s what the algorithm gives you.” Well, but who controls the algorithm? And what stops the algorithm from colluding with someone else’s algorithm behind the scenes to fix prices?

 

Again, we have antitrust doctrines about things like price-fixing, but those are based on people in a smoke-filled room saying, “Okay, you’re going to charge this, and I’m going to charge that.” … Now it’s all happening silently, through software. And so I think this one of the great competition policy challenges of our age is how to prevent those kinds of mechanisms from raising costs and raising prices and hurting consumers, while still allowing flexibility for companies to innovate and do things that, most of the time, actually wind up helping consumers.

 

Trust Between Tech Industries and Regulators

There needs to be a lot of dialogue between industry and regulators and legislators, to say, “All right. Where are these glitches? Let’s fix them.” Regulators need to be part of that and not to just assume that the status quo is the right approach. Regulators also need to be open. They need to go to these companies and say to them, “We have shared goals here. We’re not here to put you out of business, but we care about consumers, and we trust that you do, too. So let’s come up with a solution.”

 

It really has to go both ways, and ultimately, this is about trust. There needs to be a mutual process of generating trust between these industries and the regulators, and in a lot of cases, that’s lacking. But I’m hopeful, and I think the examples that we saw with the growth of the internet really are a story about good work on both sides that facilitated this extraordinary explosion of innovation and wealth creation that we saw.

 

Access the interview and read the entire transcript on the Knowledge@Wharton site.

 

Kevin Werbach is an Associate Professor of Legal Studies and Business Ethics at The Wharton School, University of Pennsylvania. He is a leading expert on the business, policy, and social implications of emerging Internet and communications technologies.

 


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