Daily Times

Uber has tried hard to destroy itself. Its failure to do so – despite every infraction short of assaulting the customers – shows the powerful forces turning the ride-hailing app into a monopoly. Such dominance is good for neither drivers nor passengers. There is, however, an elegant answer: to copy the very symbol of free market capitalism and treat Uber like what it truly is, a stock exchange.

Online platforms such as Uber for rides, eBay for auctions or Airbnb for hotels enjoy a network effect. This very quickly results in one player in the market. The more drivers on Uber’s taxi-hailing app, the better for riders; once the riders are using Uber, the drivers can go nowhere else. That network effect underpins its $70bn valuation, forced Uber to sell its China operation to local leader Didi Chuxing, and explains why behaviour such as founder Travis Kalanick’s sweary tirade at a driver does little business harm.

Platforms are one species of the superstar companies taking an increasing share of total income in the economy, according to economist David Autor and colleagues. A dominant Uber is bad for riders, who get no choice or innovation; bad for drivers, who face a monopoly employer; bad for competitors, who have no chance no matter how good their product; bad, in short, for everyone except a few founding investors who capture most of the value in the global taxi industry, forever, simply by moving aggressively on a fairly obvious idea.

Monopoly ruins capitalism. But traditional antitrust measures – ordering a break-up or regulating prices or conduct – are powerless before the network effect. Europe is fining Google €2.4bn for abuse of its dominance in web search. The Democratic party in the US wants tougher scrutiny of mergers. Neither will make much difference to platforms such as Uber.

What we need is a shift in perspective, a change in our understanding of what a business like Uber really is: not a smartphone app, not a taxi-hailing service, not a software company, but a marketplace where buyers meet sellers in order to trade. Uber, a classic middleman, has inserted itself between the two.

There is a fine, historical model of how to run a fair and open market. Stock exchanges evolved out of the physical marketplace of a coffee shop, but online platforms need the modern version that began in 1975, when Congress created the National Market System in order to boost competition in equity trading. It should pass a similar law for online platforms.

The NMS has several rules but two matter a lot. The access rule says markets must maintain electronic links to share buy and sell orders. The order protection rule says brokers must send orders to the venue with the best price. Together, they turn multiple stock exchanges into a single composite market. Everyone can see and trade with everyone else.

Almost exactly the same rules would work for ride sharing. The access rule would require Uber and its rivals to provide each other with feeds of bids – that is, geo-located passengers looking for a ride – and feeds of offers – drivers looking for a passenger. The order protection rule would require Uber to match riders with the closest available driver, whether that driver was using their own app or a different one, such as Lyft.

For a passenger, that means when they open their Uber app, they can see and hail cars driving for Uber, Lyft or any other provider. Likewise for drivers. All the market’s liquidity is available through every provider. The network effect becomes irrelevant. The monopoly is broken.

Competition would sweep the market with profound results. Existing operators would give up loss-leader pricing. New services would spring up to connect riders and drivers to the market: if Uber’s chief executive swore at a driver, the driver could easily go elsewhere. A genuine market price would emerge for the brokerage service that apps provide.

Turning platforms into exchanges would need a certain amount of infrastructure: a settlement system, for example, so passengers using one app could pay drivers using another, leave feedback or resolve disputes. But if it is possible to link trillions of dollars in trading across thousands of equities on dozens of exchanges, then it is possible to do the same for ride-sharing.

Just as in financial markets, exchanges work best when a product is standardised, but the principle extends to other platforms with a network effect. Luigi Zingales and Guy Rolnick of the University of Chicago have made a similar proposal for social networks: that data portability is required, so a user can access all their Twitter data from Facebook, or vice versa.

The case to act is especially strong in Europe, where foreign players dominate ride sharing or it is not allowed at all. Moving to an exchange would offer a fresh start.

Ride sharing and other online platforms have brought great benefits for buyers and sellers alike. To wreck that with regulation would be wrong. But shifting to an exchange makes the transaction more efficient, not less. In a world of rising discontent about wage stagnation and the fairness of the capitalist system, this is a liberal, free-market answer. The Silicon Valley trend of the past few years is an “Uber for everything”. Let us have an exchange for everything instead.

Published in Daily Times,August 07^th 2017.