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Tuesday, December 8, 2015

Google, Facebook Make Consumer Regulations Obsolete

Tech is better than red tape at protecting consumers

The main justification behind local, state, and federal regulation is consumer protection. A few decades ago, before ubiquitous Internet access, this reasoning may have made some sense. But in today’s economy, information is in the hands of consumers due to social media’s user-generated content. 

This means that regulators do not have to play as large of a role in protecting consumers. As the power dynamic continues to shift in favor of customers, the need for an expansive regulatory framework further diminishes.

Thanks to the disruption caused by Internet access, consumers have more power than ever before. In the past, customers controlled the buying decision, but products or services and information about them were controlled, or at least heavily influenced, by businesses. 

Web 2.0 — which allows for user interaction, sharing, and collaboration — leads to a more consumer-friendly system. The sharing economy is just the natural extension of this, with its embrace of robust feedback systems. 

Two of the brightest stars of the sharing economy, Uber and Airbnb, use post-service, dual-feedback systems where customers and service providers both leave reviews. This process reinforces positive behavior and weeds out those who make transactions difficult or unenjoyable. Customers learn that they can trust these reviews, and feedback allows companies to cut ties with those who consistently receive negative criticism. 

Even with this monumental shift in the economy, regulators continue to operate as if Yelp, Google Reviews, and Angie’s List do not exist. Regulators inspect restaurants for health violations, but when was the last time someone looking for a place to have dinner went to a government website to see a restaurant’s food safety inspection results? A much easier (and more reliable) way to pre-evaluate a restaurant is by going online to see what other diners thought of their experience. 

Regulators also ignore the reality that it is a terrible and unsustainable business model to disappoint customers. Those who feel that they purchased a good or service that did not live up to their expectations are just a few clicks away from letting anyone in the world hear about their frustration. For a business, this is a punishment as great, or greater than, a negative report from a regulator.

For this reason, the user-generated content that populates review sites and social media is referred to by author and host of “The Small Business Advocate” radio show Jim Blasingame as “word of mouth on steroids.” 

People are careful about which sites and reviews they rely on. Peer-to-peer online interaction is similar to word-of-mouth reviews — they both rely on trust. Because feedback is linked to reviewers’ public Internet profiles, the level of faith in reviews has greatly increased. Ten years ago, who would have thought that someone would willingly enter an unlicensed stranger’s car or stay at a stranger’s home? Companies such as Amazon understand the importance of accurate reviews, and are taking major steps to further cut back on fake or paid reviewers.

Social media also allows companies to build closer relationships with customers. Rather than using Facebook, Instagram, and Twitter to sell products, successful companies have embraced social media to increase trust, brand affinity, and customer service levels. 

Will Rinehart, director of technology and innovation policy for the American Action Forum, told me, “Social media allows producers to learn where consumers are, expanding their reach beyond local communities. Relatedly, consumers are able to quickly tell producers about concerns, increasing accountability.”

To test Rinehart’s assertion, next time you are in an airport and experience an excruciating delay, try tweeting at your airline. Every time I have done this, I have at least received an apology, and often there is an explanation for the delay and an update on when I can expect to board. 

One time, during a particularly agonizing delay that I shared with my Twitter followers, I even received a full reimbursement and an additional flight credit from Frontier Airlines. There is no way this amicable result would have happened so quickly and painlessly two decades ago.

The policy President Bill Clinton endorsed of letting Internet companies develop mostly free of tax and regulatory burdens contributed to the sector’s rapid growth — and the consumer empowerment that came with it. Internet companies have still managed to largely escape regulation, though that is changing — fast.

Net neutrality and other regulations on Internet companies that are, of course, promulgated in the name of consumer protection, threaten to unravel the increased access to information brought about by the peer-to-peer economy. Policymakers are regulating in search of a problem that is simply not there. 

When crafting regulation, policymakers need to keep in mind that the relationship between consumers and service providers has been transformed for the better. Rather than keeping consumers safe, regulators are now threatening the growth of the peer-to-peer system that has proven to be the most effective way to increase consumers’ access to information. 


This article first appeared as commentary at E21.

  • Jared Meyer is a fellow at the Manhattan Institute for Policy Research. His research has been published in The Wall Street Journal and National Review.