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Regulation of Integrated Emerging Industries: Main Problems and Suggestions

Aug 14,2017

By Shi Guang

Research Report Vol.19 No.4, 2017

History experience shows that every major technological advance or economic crisis leads to substantial changes in the philosophy of regulation as well as what and how to regulate. The rapid development of integrated emerging industries enabled by Internet technologies has become an irreversible trend, and to figure out how to properly regulate them is an urgent issue to be addressed. Are the regulatory theories and policies for traditional industries applicable to integrated emerging industries? What are the new features of integrated emerging industries that make their regulation different from that of traditional industries? To solve the problems facing the regulation of integrated emerging industries, is it necessary to make adaptive adjustments to traditional regulation only or to carry out a major institutional reform? This paper will examine the connections and differences between the regulation of integrated emerging industries and that of traditional industries, discuss major problems in the regulation of integrated emerging industries and put forward some policy suggestions accordingly.

I. Connections and Differences between Regulation of Integrated emerging Industries and that of Traditional Industries

With the further implementation of the Internet Plus action plan, the Internet continues to integrate with traditional industries, as a result of which a number of fast-growing new businesses spring up in online retailing, online payment, e-hailing, online television and other fields. In July 2015, the State Council introduced the concept of “integrated emerging industries” in the Guidelines on Actively Promoting the Internet Plus Action Plan, calling for proper and effective regulation to put the market in good order.

Theoretically speaking, proper government regulation is an institutional arrangement to replace the market mechanism in case of market failure. There are many reasons for market failure, which are classified in the table below as supply-side factors, demand-side factors and market factors. The reasons for the regulation of seven typical industries are also listed, of which the first three are traditional industries including power grid, communications, banking and television while the other three are typical integrated emerging industries. The table shows that there are no unique or significant regulation reasons to distinguish integrated emerging industries from traditional industries.

The reasons for the regulation of traditional industries basically overlap with those for integrated emerging industries but the focuses are different. The reasons can be divided into three categories. First, common reasons. For example, network externality is an important reason behind the government’s regulation of the communications industry, which also applies to the regulation of e-hailing and online payment. Second, reasons mainly for traditional industries. For example, service availability is a regulatory requirement that businesses providing public utilities must meet, which is not necessarily true for integrated emerging industries. Third, reasons mainly for emerging industries. For example, communications and other traditional industries also have platform effects but they are far less important than those of integrated emerging industries.

There are no fundamental differences in theory between the regulation of integrated emerging industries and that of traditional industries, but the two still somehow differ in policy practice. The differences are in quantitative rather than qualitative terms but their impact cannot be ignored. They can be seen mainly in the following five aspects.

1. Integrated emerging industries can achieve greater economies of scale

The Internet platform is the core infrastructure for integrated emerging industries. The network platform has a strong marginal cost reduction feature, which leads to a winner-takes-all situation. Once an Internet platform occupies a dominant position in the market, it will bring the competitive advantage of being “too big to fail”. This is also the primary cause why a large number of start-up enterprises would rather suffer a substantial loss to subsidize customers and seize market shares in the early stages. Once users are accustomed to using some Internet platforms, path dependence will occur so they would be reluctant to turn to other competitive platforms due to certain conversion costs. Therefore, once an Internet platform is bigger, it will have stronger market dominance, and market competition will tend to be weakened. Furthermore, the platform will also tend to abuse market dominance, and even prevent new entrants and potential competitors from entering the market through various means, damaging the welfare system.

The economies of scale are also found in power grid, communications and other traditional industries, but they are relatively weaker than those in the Internet-based industries. Since the end-user market for traditional industries is regional, the government usually boosts market competition to improve efficiency by means of horizontal and vertical splitting, introduction of competitors and competitive benchmarking, etc. For example, the national power transmission network was split into State Grid and China Southern Power Grid in the power sector reform of 2002. The two companies do not engage in direct competition in the same area but they look to each other in running their business. Another example is the competition on a national scale among mobile network operators such as China Mobile, China Unicom, and China Telecom. China Mobile has the largest network coverage, but it is far from the “winner-takes-all” advantage. By contrast, it is difficult to split the Internet market because it is subject to no geographical restrictions, and all companies are in the same national or global market.

2. Internet platforms serve many quasi-public functions

Internet platforms act as clearing houses. A large number of economic activities are matched through these platforms so they serve many quasi-public functions that shall be regulated properly, or it may result in systemic risks. For example, online payment, online loans and other activities of Internet finance are subject to no geographical restrictions, and involve a lot of people, making risk control and regulation difficult. E-commerce platform operators should take on the responsibility of ensuring the quality of goods and payment security while e-hailing platform operators should be responsible for consumer protection and driver qualification review. In a traditional sense, these are the government’s responsibilities.

Since integrated emerging industries are rather new, the government is found absent in the said functional areas, and these public functions are now served by the platform operators. However, since most of such platform operators are private enterprises whose main concern is profit, whether they can perform the public functions is doubtful. Even if those platform operators are willing to take on the responsibilities, they still have to face the dilemma of lacking authorization and law enforcement capacity.

3. Local regulation is not enough for the Internet economy

Given the wide differences between regions and the existence of governments on many levels, regulation in China is the usually the responsibility of local governments. For example, county and municipal governments are responsible for regulating activities concerning safety supervision, environmental protection, etc. while provincial governments are responsible for regulating activities related to industry and commerce, quality inspection, etc. Putting local governments in charge of regulation is to mobilize their initiative through decentralization and make full use of local information.


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