Regulating Business Innovation as Policy Disruption: From the Model T to Airbnb

Many scholars have invoked the term disruptive innovation when addressing the platform (sharing) economy, with sweeping claims about the dramatic changes this development promises for law, regulation, and the economy. The challenges raised by the platform economy are surely important, but we argue that recent scholarship focusing on the immediacy and novelty of the platform economy has been ahistorical, and has therefore missed the bigger picture about how to regulate it. History is full of technological and management advances that fundamentally disrupted business models for a brief period of time. When business innovation upends a preexisting business model in a regulated industry, the result can be a disjunction between the structure of the regulatory system governing incumbent firms and the firms disrupting the industry: a policy disruption. Policy disruption can result from conscious choices by entrepreneurs to exploit legal loopholes or to challenge regulatory protections for incumbents. But it can just as easily result from gaps in a regulatory regime or fundamentally new business models that solve problems legal regimes have been designed to address. This Article is the first to offer a comprehensive analytical framework of how business innovation can create policy disruption and how regulators should respond. We develop a three-step process that should guide regulators in responding to policy disruptions, suggesting that, as a default, regulators should strive to be neutral as between incumbents and innovators. We conclude by offering specific policy instruments that regulators can use to draft laws more neutrally to avoid or limit such policy disruptions in the future