Why services like Airbnb don't need government regulation

Over the past week, the proposal of the Minister of Tourism Nikolina Angelkova to introduce stricter regulation of sites like Airbnb.com has become a serious subject of debate in the media space. Angelkova's thesis is that these sites practically operate as intermediaries for hotel services. For the uninitiated, in simple terms, Airbnb.com is an internet platform that allows you to rent out your property, or part of a property, for a short period of time.

What is the argument in support of regulation?

Since the rents of properties offered through such platforms are in most cases lower than the prices in hotels, tourists often use them as an alternative to hotel services. Minister Angelkova came up with a proposal that these websites be treated as intermediaries of hotel services and accordingly be forced to allow the promotion of only licensed hotels. This would practically completely eliminate the offer of properties through this platform by private individuals.

The real argument in favor of regulating (and possibly banning certain aspects of) services like Airbnb is that they are, in effect, unfair competition to the hotel industry. Unfair because individuals who offer their properties for rent through such sites are not required to meet the same requirements that hotels and their owners must meet.

Minister Angelkova's argument in support of this type of regulation is based on the thesis that people who offer their properties for rent through sites like Airbnb and Booking.com are in fact offering tourism services and therefore should be regulated as such. To determine whether this argument is valid, we need to answer two questions.

First, are people who offer their private properties for rent really carrying out a commercial activity that falls into the same category as hotels? And second, even if they do fall into the same category, is it necessary for the state to regulate their activity? The answer to both questions is a categorical "no."

Airbnb merchants cannot be classified as hoteliers

Regulating people who rent out their properties through such internet platforms as hotels means regulating them as offering tourism services. This is inadequate because tourism services do not only include renting out a property. Tourism provides a package of services that include food and a host of other amenities that are provided by the respective hotel. People who simply rent out their property do not offer the same package of services that are offered by hotels and therefore it is inadequate to treat them as an identical type of trader by law. And most of the traders on Airbnb are just that.

But step away from Airbnb for a moment and consider that such a regulatory regime would mean that any rental of a property would have to fall under the heading of "tourism service," if the law were consistent. By this logic, renting out a property means that you are offering a tourism service. This proposed regulatory reform is specifically aimed at sites like Airbnb and Booking.com, but the only difference between them and other domestic-oriented property rental sites is that the former are aimed at the external market—people who are temporarily staying as tourists.

But at a fundamental level, the service is the same – a property is rented out for a certain period of time. This categorically cannot be classified as a hotel-type tourist service and therefore it is insane to regulate it as such.

When is government regulation necessary and when is it not?

Even if we accept the premise that simple rental can be classified as a tourist/hotel service, regulation is not necessary. Because hotel services themselves do not need regulation these days. The main argument in support of state regulation of any service is to prevent potential fraud. Fraud such as providing a worse service than promised or not providing the promised service (or part of it) at all.

The role of these regulations is to compensate for the information asymmetry between consumer and merchant. That is, they compensate for the fact that the consumer does not have access to the necessary information to understand whether the respective merchant is fair or not. It is precisely because of the lack of easily accessible information about the fairness of the merchant in question that consumers feel more secure when they know that he is regulated by the state and this is clearly documented - through licenses and so on. Through the regulatory regime, the state practically promises and gives guarantees to the respective consumer that the merchant will be fair.

That is why regulatory regimes are created by the state, which set certain rules that traders in the relevant sector must comply with, in order to have some guarantee for consumers that they will not be deceived. And of course, there are state agencies that monitor the implementation of these regimes and rules and sanction those traders and enterprises that do not comply with them.

How digital technologies eliminate the need for regulation

The problem with the aforementioned type of regulations is that they limit the innovation potential of the economy, because when an innovative practice emerges, it can often turn out to be practically illegal, simply because it does not fit into the regulatory regime, without actually being some form of fraud. This was precisely the case with the ride-sharing company Uber. But on top of everything else, in the 21st century, these regulations are not just outdated, but completely unnecessary thanks to modern digital technologies.

Every Airbnb user can check on their site what other users have said about a given merchant. And these user reviews are in addition to the detailed information about the property, which the respective merchant is required to disclose in order to use Airbnb services. If there are many good opinions about a merchant and his property, then the user knows that he will most likely be satisfied with the service. If there are many bad opinions, then he will most likely not be. If there are no opinions at all, he will most likely decide that the available information is not enough to judge and will go to a merchant for whom there are more opinions from users.

In short, thanks to modern digital technologies, the information asymmetry that justified the existence of regulations on services in these categories (tourism services and property rentals) no longer exists. Within two or three mouse clicks, any user can find all the information about a given trader that they need.

Ultimately...

Even if we accept the otherwise rather inadequate classification of Airbnb and Booking.com as intermediaries of travel services, imposing state regulation on them is still unnecessary, because the highest form of regulation – consumer regulation – is available and extremely accessible. The same applies to Uber, all ride-sharing companies, and the modern digital economy in general.

Why then do state authorities insist on continuing to regulate these types of services? There are several possible answers, but since this question is extremely deep, it is better to leave it for another article. In short, it can be said that there is both an internal and external lobby against reform and repeal of the current regulatory regime. Internally, from the state authorities - from bureaucrats who will lose their jobs if suddenly there is nothing to regulate. And externally, from the private sector, and specifically companies from the tourism industry, which are losing market share because the housing offered for rent through Airbnb is used as an alternative to hotel services.

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