The Invisible Hand, the Regulatory Touch or the Platform’s Iron Grip?

Abstract

The “invisible hand” has become an icon for an economic philosophy that assumes a laissez-faire governmental policy will result in optimal social and financial outcomes as market forces will drive a socially efficient equilibrium. This approach is in tension with another philosophy that emphasizes the role of regulation in correcting market failures that inhibit markets from functioning smoothly. At the heart of this paper is a third approach to market regulation—that of the multi-sided platform. Multi-sided platforms are designed specifically to control and craft parties’ underlying transactions. In the modern era, data-savvy platforms collect information on every participant and transaction; control entrance, information flow, and competition design; assist in searching and matching; set the contractual terms (and sometimes even price) of a finalized transaction; allocate risk between parties; and are often involved in enforcing the transaction or resolving disputes. Thus, the laissez-faire assumption of refraining from government intervention in markets takes on a new meaning as it leaves the market to be governed not by the invisible hand of competition, but by iron grip of the platform that closely monitors and designs every aspect of its underlying parties’ interactions. This paper suggests that when assessing whether regulators can concede some of their roles to private actors, competition and transparency can act as central forces aligning platforms’ incentives with those of the public, and conversely, as platforms’ activities and policies grow more opaque, or competitive forces are weakened, policy makers should be concerned that such regulatory powers may be misused.