The Sharing Economy
Last summer I was the unpaid intern at a local tourism startup in Toronto. We turned regular people into tour guides for tourists across the globe. We were a part of something similar to a ‘sharing economy’, where individuals are able to rent assets owned by somebody else.
How about you? Do you own a power drill? Have you used it in the last month? How about the last 6 months? The average total usage for this expensive good is only 13 minutes! Cases like this have triggered businesses such as https://www.peerby.com/ that connect providers and consumers of shareable goods. There is a demand for greater independent income as well as a market of people willing to purchase a cheaper product, even from a stranger. But it definitely doesn’t stop at power tools. Huge platforms such as Airbnb (housing and lodging) and Uber (taxi service) are growing like crazy, easily rivaling their traditional counterparts.
VALUATION OF UBER, GENERAL MOTORS, AND FORD
The advantages of this emerging economy are easy to see. Not only is it easier to gain income and enter jobs with traditionally high startup costs, sharing economies add value to millions of unused assets. These popular platforms have troves of consumers benefiting from cheaper service, more competitive prices in traditional industry, and a social element in commerce! Finally, there are options for cheap temporary use of expensive goods. As ‘collaborative consumption’ becomes a bigger part of industry, everyone benefits from the positive environmental impact and economic growth.
However, as the sharing economy flourishes, drawbacks have already started to emerge.
While highly demanded, companies like Uber, AirBnB, and TaskRabbit also shift money away from traditionally secure jobs.
An unexpected downside to peer-2-peer markets is that extra low-skill work done by providers results in,
Income inequality is bad enough; the sharing economy only exacerbates the problem.
Providers are also often well educated and are selling services typically provided by workers with lower education. This reduces opportunities for less skilled workers. With Airbnb, a lower demand for lodging results in fewer low-wage jobs like housekeeping, or food services. In the case of Uber, Taxi drivers are being displaced by Uber drivers.
In addition, sharing economies tend to create a network monopoly. Platforms like Amazon, or Uber require a large network of both providers and consumers to be successful. They are similar to social networks like Facebook or Twitter as they offer more utility while scaling in size themselves. Reaching critical mass is in itself a sustainable competitive advantage. New competition finds it incredibly difficult to penetrate the market.
“When it gets to a full fledged network monopoly, the network is ground to a point where other platforms could compete, but it’s difficult for them to offer users the same levels of utility without offering the same size of the network effect.”
In a trend leading towards networks in every industry, governments need to address the issue of network monopolies. Technology has drastically changed how clientele and businesses grow. Past regulatory policies aren’t the right way to handle the growth of network platforms like Uber and Airbnb.
What about providers on these sharing platforms, why would someone lend their assets to a stranger? The main incentive for ‘employees’ in a sharing platform is the extra income. The economic monetary benefit, even with inviting a stranger into your home or car, is greater than the opportunity cost of having the place to yourself but not getting paid.
Many platforms like Uber, Airbnb, and Taskrabbit started after the 2008 economic crash.
In 2015 it was found that there were 3 main incentives for providers, rational people seeking as much money as possible (33%), providers focusing on the social experience (40%), and those who just needed a bit of extra cash right now (27%). Despite how the sharing economy is taking jobs, most providers need their income to afford their own homes. 62% of Airbnb hosts in NYC, 5,600 in Berlin, 53% in Barcelona, said Airbnb helped them keep their home. The extra cash goes a long way.
The downside of being a provider is the lack of job security. While these services grant great independence, by their nature they can’t guarantee consistent income. There is also risk associated with allowing customers into your home or car. Airbnb and Uber do provide 1M as standard insurance, but employees must accept the risk.
Despite the costs, I believe the sharing economy is overwhelmingly beneficial. It’s clear by the numbers and their rapid growth that these platforms solve problems plaguing legions of users. I believe the biggest controversial issue relating the sharing economy is their impact on traditional jobs.
Impact on Competitors (Focusing on effects of Uber and Airbnb)
The sharing economy threatens the job security of traditional businesses. Platforms like Airbnb and Uber gain their value by connecting and enabling an exchange between customer and provider. Because they don’t produce any of the assets or services exchanged, they have tiny overhead and variable costs. Growing their network by 100 000 users can be as simple as adding another server. The cost for Uber to create another UberX driver, the marginal cost, having already such a large network is negligible. Traditional taxis that have to pay for cab licenses, maintenance, and their cabs, have no way of competing with this kind of revenue model.
The entrance of suppliers from the sharing economy causes an increase in supply. A shift to the right of the supply curve, with a constant demand, results in a lower price but higher quantity sold. At the original price, there are only a set number of rides wanted. The additional transportation providers result in a surplus and a competitive market brings the price down. In Toronto 2015 the taxi base fare price dropped a dollar from $4.25 to $3.25. In New York, taking into account market growth, it’s expected that 35% of Uber’s rides came from purely untapped demand and 65% came from rides that would have otherwise gone to taxis.
Sharing platforms such as Uber are a substitute to other transit options, this includes the public transit. A study in 2016 estimated that Uber causes an average drop of 12.8% in bus rides before versus after entering a city.
Taxis are forced to charge less, however, Uber often still charges less than traditional taxis, borderline predatory pricing, and still make a profit. Due to how price is calculated, unless you’re in New York during traffic congestion, Uber is always cheaper. Flywheel (DeSoto Cab), San Francisco’s oldest taxi company sued Uber for their impossibly low prices after filing for bankruptcy. Predatory pricing is when a company sets low prices with the aim of forcing out competitors. With other suppliers removed, Uber in its future monopoly would be able to charge whatever it liked. Due to the huge start-up costs of a taxi service, it’s a difficult market to enter and leave, making it a profitable industry to monopolize.
Flywheel claims that Uber is abusing their venture capital funding and must be losing profit on rides, Uber denies this. Instead Uber states that prices were lowered due to competition with Lyft (another ride-sharing platform), traditional taxis, and public transit. Uber’s ride-matching platform has also been shown to find more rides than traditional taxi services. This, along with their low overhead, allows them to set a smaller profit margin. Even with cheaper prices Uber drivers often make more than their taxi counterparts.
Based on 2016 Report by the National Bureau of Economic Research
Fascinating enough is the difference in impact between the entrance of Airbnb on temporary housing business, compared to Uber on taxis and public transit. Uber is the biggest example of loss for traditional businesses. However, this may be because the taxi industry essentially had a monopoly over for-hire transport via city limitations on cap medallions. More competitive markets like hotel and lodging react faster to competition. Though Uber and Airbnb have multi-billion valuations, with just a 5 hour google search it’s clear Airbnb’s growth in its sector is not seen nearly as negative.
Airbnb another peer-2-peer platform, turns spare rooms or housing into temporary vacation rentals. These rentals mostly appeal to family and individual travel, leaving business class lodging virtually untouched. While growth from giants like Marriott, and Hilton still have a higher marginal cost, in 2015 they grew by 5%. This may pale compared to Airbnb’s 70% growth but hey, as investing reporter John Divine says,
“Hotels that do not cater towards business travellers,” are forced to lower their prices, (increase in supply, constant demand), there has been an 8-10% drop in overall revenue mostly from these hotels. However in New York where Airbnb has 25% of all lodging, there was a 2.9% drop in daily rates last year, in LA where Airbnb has 12% there was a rise in 9%.
While Airbnb is undoubtedly hugely successful, the impact on hotel and lodging appears much less damaging than Uber on transport.
Toronto, NYC, and many other cities used a medallion system to restrict the number of cabs on the streets; it was an entrance into the monopoly of for-hire transport. In order to legally drive a cab, drivers would have to buy an expensive ‘medallion’. 3,000 medallions were sold at about $ 360,000 each, though most owners don’t actually drive a taxi. Instead, 78% of taxi plates are rented out from wealthy owners. The taxi medallion system is incredibly beneficial… for medallion owners at the cost of everyone else. By creating barriers to entry, taxis have become an ‘artificially scarce good’. The system sets the supply of taxis below the market’s natural equilibrium of supply and demand. Medallion owners can then charge much more than the market would normally support. For taxi drivers, this means
“In San Francisco, New York, and Boston, for example, drivers must earn roughly $100 per day (not counting fuel and other incidental costs) just to cover the cost of the medallion rental and break even.” – Jason Snead Policy Analyst.
In NYU and many other cities, the taxi industry had stagnated. There was no need to stay innovative. Even against the rise of Uber, the reason they lost so much of the market share was likely due, in part, to their reluctance to act.
Uber, does not need medallions for their UberX, they are a platform connecting drivers and people, they don’t own cabs. The policy regarding the medallions is outdated. Due to the system and the cost of renting them, cab drivers don’t make much. With the introduction of Uber, the monopoly is broken and the value of the medallion has plummeted. Though it ruins investment on the medallion, (likely a bubble in the first place), the old business model was focused on generating revenue for the city, as opposed to improving quality of service.
Unlike the hospitality industry with Airbnb, the taxi industry, medallions owning companies act on their own interests, not those of the industry. Not enough money was spent on addressing their new competitor (ie. marketing, PR, lobbying for better policy).
They were not competitive enough, perhaps it’s time for that to change.
Personally, I support the abolishment of the medallion system; less regulation in both taxis and Uber would likely provide better service for both drivers and riders. This would call for a reimbursement plan for medallion owners. Another major reason Taxi drivers can’t switch to Uber, even though in many cities Uber offers better pay, are the exit costs of the taxi industry. Companies and drivers that own medallions can incur a massive debt, and as the medallion value declines selling them isn’t enough. It’s unfair, a lot of medallion investors feel like something is being stolen from them.
The city at the time promised a solid investment, and because the rise of Uber & Lyft that promise turned that sour. Instead of restricting the sharing economy I believe the right move would be to reimburse, to save Taxi companies, so they can have a fresh start. Unfortunately, from history we can see that government rarely save the common man from bad investments.
That is a specific case for the Taxi industry. In general, peer-2-peer markets can be thought of similar to automation for workers already in the industry. These platforms are threatening because of they have higher efficiency, increase the supply of low-skill workers, and tend to create a network monopoly. The pressure of competition forces existing business to become more competitive, challenging industry to find new ways of providing better service, greater safety, a lower price for customers.
Role of Government
There is also the issue with understanding providers using the platform, does Airbnb have millions of employees, contractors, or something else entirely? This definition is huge concerning tax. A great example of a legal loophole is Uber’s tax shell game. By processing international revenue in the Netherlands (Uber BV) which taxes 1% corporate revenue and sending remaining revenue to Bermuda (Uber Int. CV) which doesn’t charge corporate revenue tax, Uber utilizes a legal loophole to minimize tax. As a platform that only provides the service of connecting peers. Because there are few laws that specifically address them, it’s easier to find legal loopholes.
My favourite example of outdated policy, however lies with Airbnb and the hospitality industry.
“Existing regulations contain outdated or obsolete information such as that for hotel owners, as found in the Ontario Innkeepers Act. The act applies to hotels however almost onequarter of the regulations pertain to how an inn owner can place a lien on a customer’s horse.” Writes a study from Dalhousie University.
As sharing platforms are not responsible for provider behaviour or repairs, the focus shifts to ensuring safety and quality for consumers and providers. Big companies like Airbnb and Uber are already doing this in the forms of background checks, reviews, and records of financial transactions. As the CEO of Airbnb said in his interview on Bloomberg, they’ve been paying the same hotel occupancy tax as hotels like Hilton, and have been partnering with cities to deliver the best service possible.
It’s clear that the government must quickly rework related laws to properly address workers, customers, safety, monopoly, and tax with sharing economy platforms. I believe the role of the government shouldn’t be to restrict new platforms, but rather work to help guarantee quality of service as these businesses scale, become more profitable, continue to satisfy consumer needs.
Ideally, government policy can work in tandem with emerging businesses to alleviate cons and maximize the benefits.
|Creates jobs||Pressures traditional businesses|
|Adds value to unused assets||Requires legal rework for taxation and proper regulation|
|Creates more competitive markets||Currently needs improve provider benefits and protection|
|Inspires social commerce||Regulate safety for customers & providers|
|Positive environmental impact from reuse||Puts a price on otherwise free daily sharing|
|Offers cheap temporary use of expensive goods||Lowers demand for low-skill labour|
|Innovation and economic growth||Puts a price on typically free acts of sharing|
|Huge consumer demand||Currently no guaranteed job security|
Sharing economies are certainly worth their costs.