Passengers can access car services via the online ride-hailing platforms that make finding a taxi easier.

 

At present, market innovations and peer-to-peer instant messaging technologies have greatly reduced the transaction costs of online ride-hailing platforms.

The system’s reliability is changing the public’s mixed attitude toward the sharing economy. App-based ride-hailing services of this kind are low in cost and profitable, prompting more people to participate in the emerging economic model.

 

Sharing economy
To reduce costs, online ride-hailing platforms take full advantage of big data and instant-matching technology to build a relatively closed peer-to-peer market that can access a greater amount of participant information and resources.
 

There are doubts about the model of a sharing economy in which transactions are made between strangers. But, ride-hailing service providers use disembedding technology to resolve the issue of trust between strangers by creating an intermediary platform. At the same time, ride-hailing companies have adopted a relatively radical market strategy by investing great amounts of finance capital in order to seize the business of the traditional taxi industry and attract more application users.
 

Online ride-hailing platforms have made headway in two aspects thanks to the popularity of mobile devices. Previously, taxi drivers had to cruise the streets in search of fares. At present, ride-hailing service providers use disembedding technology to change face-to-face transactions into online orders in most cases.
 

Also, customers once reserved taxis before their travels but ride-hailing companies look for trades through the instant matching function.
 

However, laws often lag behind economic development and the current legal framework is formalism. Legal regulations are either over-inclusive or under-inclusive in terms of market innovation. As a result, workers in traditional industries tend to require executives to regulate the emerging market innovation when their interests are at risk. Legal regulations have compulsory forces and their intensity and flexibility determine the prospects of market innovation which is based on free trade.

 

Ride-hailing legitimacy
Under the current legal framework, China has strengthened the regulation on taxis and other chartered vehicles. Drivers are only permitted to offer services after acquiring licenses or qualification, according to the current rules. If they do not observe these protocols, their behavior is considered operation without license, and it is punishable under existing statutes.
 

According to the Law of Peoples’ Republic of China on Administrative Permission, governments are not allowed to issue administrative permissions in administrative rules promulgated by agencies under the State Council. In 2004, the State Council issued rules declaring that all commercial vehicle operators and private drivers required licenses for passenger transportation.
 

Any violation against the regulation will be punished in accordance with the Measures for Investigating, Punishing and Banning Unlicensed Business Operations, which were revised by the State Council in 2011. The measures are harsh for the “black taxis,” which operate without licenses.
 

Online ride-hailing platforms function by matching drivers and vehicles with passengers. The business model is extremely similar to the traditional taxi industry. The Ministry of Communication and local regulatory agencies differ when it comes to the legitimacy of app-based ride-hailing services. The ministry and other representatives have affirmed the positive influence of the new market model but they believe the platforms should not include private vehicles. In contrast, local administrative agencies tend to deny its legitimacy altogether, but they focus on different aspects.

These two sides have reached agreements to ban private vehicles,  but they oppose each other when it comes to the legitimacy of ride-hailing services. However, law enforcement agencies still have the right to ban the platforms from providing vehicles and drivers, though the view of the Ministry of Communication overides other views. This status quo has diminished the competitiveness of ride-hailing firms.

 

Legal administrations
To bypass legal regulations concerning taxis or chartered vehicles, ride-hailing service providers have altered the commercial pattern by dividing their business into vehicle renting and designated driving services. The new pattern is based on a vehicle service agreement involving passengers, online ride-hailing platforms, vehicle renting firms and labor service companies. In this kind of four-party agreement, registered application users make orders on online ride-hailing platforms. After that, vehicle renting firms and labor service companies will respectively dispatch vehicles and drivers according to customer demands. This commercial model is intended to sidestep legislation, and its long-term feasibility needs further exploration. The regulatory agencies have the final call when evaluating its legitimacy.

Considering that the purpose of the platform is to operate outside the limitations of regulation, it has little space to legitimately expand business. The toughest conundrum lies in the complex nature of the agreement. It is composed of different legal parties and a variety of contract relations. In circumstances like this, any dispute may cause difficulties in terms of applying the law because boundaries between parties are blurred. This can be seen in the platforms’ legal status and passenger responsibilities.

The agreement has also created legal chaos by operating beyond the scope of regulations. The platforms’ business model is based on the sharing economy, which is fundamentally different from the traditional way passenger transportation services are handled.

The agreement acts as a pretense, blocking regulators from intervening so that all parties obtain what they want. But when there is anything wrong, the parties tend to interpret the agreement in different ways to protect their own interests. In this way, the agreement establishes norms for internal controversy settlements and performs a legal function rather than acting as a profit generator, which violates the initial intention of the parties.
 

In the context of the market-oriented economy, appropriateness of regulations depends on two aspects: feasible goals and legitimate measures. Regulatory agencies will adopt all-or-nothing regulation strategies to deal with market innovation. They may view the emerging industry as the next phase of development for an existing industry and treat it the same way. Otherwise, they may believe the regulations do not apply to this kind of market model and ignore its barbarous expansion.
 

Regulatory agencies should take account of features of market innovation and adopt adaptive strategies. At the same time, they should comprehensively review the policy goals of the current regulatory framework and establish correspondent institutions by introducing progressive, experimental and flexible regulatory measures, thus seeking a dynamic balance between innovation and regulation. In this process, democracy and efficiency are the two major guidelines.

The biggest obstacle to market innovation is that regulators are always constrained by traditional industries and are prone to use the available regulations to halt the development of emerging sectors. Their radical enforcement is an example of legal formalism, so major issues concerning public resource allocation and public interests all turn into legal problems, which require advanced techniques. In such an atmosphere, a fierce rivalry between innovation and conservation takes shape.
 

Regulatory agencies have the most flexibility, but they deal with market innovation in a rigid way. Thus, legislative and judicial institutions cannot end the dysfunction of the regulatory system in a short period of time.
 

The model of the sharing economy, including online ride-hailing platforms, poses challenges to the traditional regulatory system. The current strategies draw a regulatory analogy in most cases, which misunderstands the essence of the sharing economy while stymieing the sustainable development of emerging business, constituting a typical type of regulatory dysfunction.
 

At present, China encourages mass entrepreneurship and innovation. Regulators should free themselves from the current regulatory framework and establish a responsive one. At the same time, they should choose a non-interpretivist path. They must explore regulatory evidence and value through democratic negotiation according to the administrative permission law, thus addressing the balance between commercial innovation and potential risks.

 

Peng Yue is an associate professor from the School of Law at Nanjing University.