It’s easy to understand why so many people embrace transportation network companies like Uber and the growing number of other ride-sourcing startups, which enable drivers to make money using their own vehicles. By allowing passengers to hail a ride via a smartphone app, these businesses offer an option that is often more convenient than a traditional taxicab service—not to mention less expensive.

With these benefits, consumers and investors are also tempted to give these companies a pass for accusations that they cut corners on issues like background checks, insurance coverage, or refusing to pick up passengers with disabilities.

“Suddenly entrepreneurship is not about who can build a better mousetrap, but who can better ignore the law and develop a corporate advantage for ignoring the law”

Consider Uber, which is involved in more than 150 lawsuits (including a class-action suit by its own drivers). Uber routinely frustrates regulators as much as it pleases consumers. It has fielded cease and desist orders from governments all over the world, often continuing operation even when ordered to stop. Yet venture capitalists have injected more than $7 billion into Uber, which has recently filed for an additional $2.1 billion. And according to various analysts, Uber is on track for an estimated valuation north of $60 billion. To say the least, the company can afford lots of lawyers to fight its global legal battles.

“Uber anticipated that regulators would have a hard time keeping up,” says Benjamin G. Edelman, an associate professor in the Negotiation, Organizations & Markets unit at Harvard Business School whose research focuses on consumer protection related to online businesses. “It’s not because regulators were asleep at the switch. It’s not because regulators haven’t been diligent in filing lawsuits—they’re filing plenty of lawsuits. But Uber is fighting back. Often the company’s strategy has been to delay regulators’ every complaint, trying to get their service that much more entrenched so it will be harder for regulators to do anything about it.”

Would we non-regulators still love Uber if it turned out Uber drivers were actually costing us money—even if we didn’t use the service?

That’s one of the scenarios Edelman invites us to consider in his article Whither Uber? Competitive Dynamics in Transportation Networks. “I’m trying to counterbalance the many papers that exult in how fabulous Uber is, and how it’s practically God’s gift to mankind,” Edelman says.

Forthcoming in the journal Competition Policy International, the article notes the benefits of Uber and its ilk, but then spells out various ways consumers might be negatively affected by the business practices of transportation network companies (or TNCs).

IS UBER DRIVING UP YOUR CAR INSURANCE RATES?

Regarding car insurance, Edelman notes that Uber covers losses in the case of an accident, beginning when its drivers are matched with a paid fare and throughout the duration of that fare. So drivers often don’t buy their own commercial insurance, opting instead to stick with personal insurance. However, in most cities, Uber does not cover drivers’ losses during the time when they have turned on the Uber app, signaling availability, but have yet to be matched with a passenger. And drivers’ ordinary personal insurance usually considers that to be commercial activity, denying coverage for any losses in this circumstance. Edelman maintains that this fuzzy period tempts drivers to commit fraud—telling their insurance carrier that they were not working for Uber at the time of the accident, when technically they were.

Edelman’s scenario goes like this: A driver in the field is on the hunt for passengers using the transportation network company’s app, but at the moment is driving empty. If the driver has an accident during this between-ride time, both the TNC and the driver’s personal insurance carrier would typically deny the claim. “In fact,” Edelman writes, “in all likelihood, an insurer in that situation would drop the driver's coverage, and the driver would also be unable to get replacement coverage since any new insurer would learn the reason for the drop.”

Thus, it makes practical sense for drivers to lie to their personal insurers, saying they weren’t engaged in TNC activity at the time of an accident. In other words, drivers may be tempted to make a false claim that they were driving on personal time, when they were truly on Uber time.

And that's a problem if these so-called personal claims increase the overall number of insurance claims for noncommercial vehicles in any given year. “If these drivers are getting into more accidents, then yes, they’re driving up premiums for everyone else,” Edelman says. “As an ordinary consumer, your rates will go up whether or not you ever use Uber yourself.”

(In related research, Edelman argues that online travel intermediaries like Expedia end up inflating costs for consumers, as do online restaurant reservation sites like Grubhub. For more, see It’s Called Price Coherence, and It’s Surprisingly Bad for Consumers.)

THE TEMPTATION TO CUT CORNERS COMPETITIVELY

Edelman contends that the current competitive landscape encourages all TNCs to cut corners, or else face the negative consequences of following the rules. He cites Hailo, a software company that links passengers with licensed cabs. Notably, Hailo ceased North American operations last year due to competition with Uber and Lyft. Edelman writes:

On paper, Hailo had every advantage: $100 million of funding from A-list investors, a strong track record in the UK, licensed and insured vehicles, and full compliance with every applicable law and regulation. But Uber's “casual driver” model offered a perpetual cost advantage, and in October 2014 Hailo abandoned the US market. Uber's lesson to Hailo: Complying with the law is bad business if your competitor doesn't have to.

The disadvantages of following rules are hardly unique to transportation network companies. “This has been a problem throughout business history,” says Edelman, using the example of a manufacturing plant that is knowingly polluting a river and getting a cost advantage from doing so. “You could try to explain to your customer why your product has a higher price: You don’t kill fish, and your competitor does. But many customers will have a hard time convincing themselves to pay extra for that, even if they care about fish.”

Edelman acknowledges that many existing transportation regulations may be outdated in the era of Uber—not to mention other successful companies in the so-called sharing economy, such as the travel home-rental website Airbnb (currently valued at $25.5 billion). But he argues that it’s dangerous to foster a corporate attitude that some rules were made to be broken.

Perhaps some laws are ill-advised and should be revisited. But it may be unrealistic to expect a company to train employees to recognize which laws should be ignored versus which must be followed. Once a company establishes a corporate culture premised on ignoring the law, its employees may feel empowered to ignore many or most laws, not just the (perhaps) outdated laws genuinely impeding its launch. That is the beast we create when we admit a corporate culture grounded in, to put it generously, regulatory arbitrage.

That opens the door to justifying corporate malfeasance, Edelman says. “Suddenly entrepreneurship is not about who can build a better mousetrap, but who can better ignore the law and develop a corporate advantage for ignoring the law. So what advice do we give students, friends, and entrepreneurs about how they should proceed?”

A CAUTIONARY TALE

Maybe the answer lies in the past. As a cautionary tale with a twist of hope for the future, Edelman reminds us of a company that had a lot in common with Uber: It was a celebrated California startup; it offered groundbreaking peer-to-peer technology; it received ample venture capital; and when sued, its executives argued it was simply offering a platform for consumers to share.

That company was Napster, the MP3 file-sharing service that was forced to shut down in 2001 after losing a legal battle against several major recording companies.

“Consumers love Uber,” Edelman says. “They loved Napster, too. When Napster got shut down, consumers were very upset. For one, they said we needed Napster to get innovation like immediate music downloads and access to more music than any record store could stock. But in fact, in short order the legal alternatives became surprisingly good, arguably much better than Napster. Today, we enjoy iTunes, Amazon Music, Pandora, and countless others, which we certainly wouldn’t have if Napster had been able to keep operating with a perpetual cost advantage.”