Do you have an extra power tool lying around?
Is your spare bedroom in the basement going unused?
Do you need a little spare income to pay off your second mortgage?
If you answered yes to any of the above questions, there lies an untapped market waiting for you – whether you need a little spare cash or are looking for a full-time job, there are exciting opportunities lying in wait for you. It’s a promising new sector with tremendous growth in the past 5 years, and is rapidly outpacing the expansion of traditional service industries.
We call it the sharing economy: an economic model in which individuals are able to borrow or rent assets owned by someone else.
The Airbnb you stayed at on your last vacation? One of the many moving cogs in the machinery of the sharing economy. That Uber you took to the movies the other night? It, too, was one of the many components of in this diverse peer-to-peer network. These businesses, many of which first began life less than a decade ago, have risen to incredible valuations in a very short amount of time – we’ll see this further as we analyze the growth of individual markets within the sharing economy.
Of course, with the advent of such a new and intriguing market, there are exciting opportunities and also worrisome obstacles presented. The real question is: is the sharing economy truly beneficial for us all?
Let’s find out.
Why the Sharing Economy Works
One of the reasons for the tremendous growth of the sharing economy in its short history is its incredible, unparalleled efficiency in distribution. In classical economics, efficiency in distribution refers to an economy in which the allocation of goods is able to make each person better off without making anyone worse off. The sharing economy is very efficient at providing consumers with a wide variety of goods and services at low costs. Expensive, luxury items that were once just fleeting dreams of the middle class are suddenly available at our fingertips.
Take this 2015 Mercedes Benz CLA-Class, for example, courtesy of cooperative car rental service Turo. For just $68 per day, this pristine, high-end car is yours – “all the luxurious features a car can offer” included. If you’re looking for a mountain bike to explore the great outdoors, you’d be hard pressed to find a better deal than this 2015 Masi Alare. It is just one of thousands available on bike sharing service Spinlister, and is yours for the day for the low price of $25.
Through this novel redistribution of goods, the borrower saves the cost of the purchase, instead paying a comparably negligible fee, while the renter generates income for an otherwise underused asset. The under-utilization of these assets is referred to as the idling capacity – the untapped social, economic and environmental value of an asset. Through the sharing economy, consumers are able to get the required utility from goods and services, but for a fraction of the cost. We no longer need to buy an expensive power tool, or a pricey mountain bike, for a few hours of use annually. As a result, the sharing economy is one of the most efficient distribution systems in place together, and its efficiency is responsible for two of its primary strengths: adding value to existing assets for renters, and providing more variety in goods and services for consumers.
This market also provides an economically viable method for dealing with scarcity. Economists define four primary methods of dealing with scarcity:
- People can do without some of the things they want.
- People can create more resources by new discoveries, more training, and better tools.
- People can produce more through better use of resources.
- People can redistribute goods and services so that everyone has enough.
In many ways, this is the most cost-efficient way for consumers to gain access to previously inaccessible goods and services. No more production is required, very little additional training is required – beyond simply learning the ins-and-outs of the Uber and Airbnb interfaces, and neither consumers nor providers are required to give up the things they want. The median income earned from Airbnb in New York City in 2016 was $5,474, a modest but certainly remarkable total for those looking for a bit of spare cash. Up North, Canadians – and millennials in particular – are using the service to help pay off their mortgage by renting out spare bedrooms. Renters are redistributing their assets, offering the tourism industry a novel alternative to traditional, more expensive hotel chains. Furthermore, the hours are incredibly flexible, meaning renters can supplement a primary income with additional revenue. This cements another one of the sharing economy’s greatest strengths: the ability to create new job opportunities for those in need.
Lastly, it’s worth considering the tremendously positive impact of the sharing economy on the environment. According to Nicolas Voisin, the founder of TheAssets.co, “80% of the things in our homes are used less than once a month, and self-storage has increased by 1,000% over the past three decades.” The idling capacity of many of these assets has been tapped by the sharing economy – and it seems that the environment is also reaping the benefits.
Estimates on the eco-friendliness of peer-to-peer car rental services such as ZipCar vary, but even the most conservative estimates say that “at least 5 private vehicles are replaced by each shared car”. Another study, conducted by Berkeley’s Transportation Sustainability Research Center in 2015, found that 20% of ZipCar users sold a personally owned car after joining the service, while another 20% avoided purchasing a car as a direct result of the platform.
Other studies also indicate the positive environmental impact of other sharing services such as Airbnb. A study conducted in tandem with the 2015 Paris Climate Change Conference found that if 50,000 participants at the conference had booked with Airbnb, rather than traditional hotels, they would have saved over 21,000 kWh over energy, and over 71.4 million litres in water. Remarkable statistics such as these further illustrate that the sharing economy’s phenomenal green impact should not be underestimated.
The Limits of the Sharing Economy
However, the sharing economy also presents a number of obstacles ahead for providers, consumers, and other businesses.
It is worth noting that for individual providers (that is, renters of a good or service), the sharing economy operates in a state of nearly perfect competition. A market of perfect competition is one that fulfills five primary criteria:
- All firms sell an identical product.
- All firms are price takers – they cannot control the market price of their product.
- All firms have a relatively small market share.
- Buyers have complete information about the product being sold and the prices charged by each firm.
- There is freedom for firms to enter and exit the market.
Given the breadth of goods and services available through the sharing economy, the precise nature of competition varies. Peer-to-peer car rentals through ZipCar, for example, do not fall within the umbrella of ‘perfect competition’. However, many other shared services such as Uber, Lyft, and JustPark (a parking service) do categorically fit these criteria.
For one, the goods and services being offered are nearly homogeneous – while Uber does offer varying classes of ride-sharing services, from the low-cost UberX to the luxury UberBLACK, individual providers within each class have very little to differentiate their service from others. As a result, the first criteria is fulfilled. Additionally, providers are price takers and given the multitude of other providers (there are over 327,000 active drivers in the U.S.), they have a relatively small market share. All information about the services on offer are available on the website of the sharing platform, and there are minimal barriers to entry – among them, a driver’s license and some driving experience.
So why is this a bad thing for providers? Well, in a state of perfect competition, individual firms – or, in this case, providers – have a perfectly elastic demand. In the sharing economy, the demand for services is very elastic. As a result, individual providers cannot change the prices charged for their services without drastically lowering “quantity” of their service demanded – for example, an UberX driver that attempts to charge prices above the established market equilibrium price will lose riders to other drivers that maintain this price. Additionally, in the long run, drivers will tend to make very little economic profit (in a true state of perfect competition, they would make no economic profit), as the number of providers increases and the market equilibrium price lowers further. According to CBC, once payments on car ownership and gas are considered, total wages amount to approximately $8 per hour. Uber furthermore discourages tipping for drivers.
What does it all mean? Simply put, the most worrisome aspect of the sharing economy is that platforms have far too much power. As Airbnb and Uber must first contract their renters and drivers, respectively, the profits of individual providers are directly controlled by the sharing platforms. They can refuse to accept more renters or drivers in a certain area if they feel it is too saturated, thus giving them control over the supply of the entire market. Furthermore, the platforms can decide minimum or maximum prices, and can take various cuts of the profits. Uber, for example, takes a cut of 25% of the fare price, while Airbnb takes a 6-12% service fee from guests and 3% from the hosts. According to both companies’ terms of service, this fee may change in the future.
This gives the sharing platforms the power of a government body, with the ability to set prices and regulate the market as they see fit. Complicating this issue is the fact that the sharing economy tends to exist as a series of monopolies, and the most aggressively expanding platforms tend to easily establish a nearly impenetrable base in each city. In the American ride-sharing market, Uber controls an estimated 87% of the market, which looks especially poor for its primary competitor Lyft. Now that it has established control in markets such as New York City, prospective drivers looking to enter the market are given almost no other option but to provide services through Uber if they want reasonable exposure to customers. While the barriers to entry are still minimal, it does emphasize that in the sharing economy, there is simply too much power in the hands of the platforms and not enough for individual providers. There must be amendments made for the protection and benefits of providers.
The sharing economy also puts great pressure on traditional businesses. As a result of the staggering growth of peer-to-peer markets, traditional service businesses are forced to reconsider their own branding and market strategies. Many analysts now believe that Airbnb is set to “usurp Hilton Worldwide as the world’s largest hotel chain – without owning a single hotel.” After all, the growth of Airbnb in the past 5 years far eclipses that of Marriott, its nearest competitor. See the figure below. Marriott itself recently announced the launch of its workspace on demand, a sharing economy-style platform intended to compete with the likes of Airbnb in this new market.
Visibly compounding this problem are the ill-defined regulations of licensing and taxation for these companies. This is especially prevalent in the ongoing legal battles between Uber and municipal taxi services. While taxi drivers must pay annually for the business permit, plus application fees, they must also have three sets of insurance: total liability, property damage, and personal injury assurance. Uber drivers, meanwhile, are covered by the company’s $1 million per car policy. Taxi drivers must pay municipal governments for inspection prior to service on a regular basis, while Uber vehicles must only be inspected once prior to service as per the terms of service. The drivers aren’t even required to go through job interviews – registration is done online only. Note that in most cases across North America, Uber driver regulations are managed by the company, rather than the government, given its novelty. As a result, Uber easily siphons away the typical customer market of these traditional businesses.
Continually declining taxi rides in favour of ride-sharing services illustrate the depth of this issue and the impending need for a crackdown by government bodies. Certainly, Uber offers an exciting alternative to traditional taxi services, but it is important for consumers and employees of both taxis and ride-sharing platforms that there are consistent standards in place.
Co-Operatives, Unionized Sharing, and The Government
Under the current market structure, individual contracted providers operating under the umbrellas of larger platforms have very little say. This is partially due to the inherent nature of the sharing economy – being a market of almost perfect competition – but also due to the monopolistic tendencies of the platforms with aggressive management and marketing. As discussed above, these firms have incredible power over the marketing and distribution of the entire market. Individual renters and drivers can’t pack up and leave, because the market exposure is already dominated by the big firms; you can’t try to rent your goods elsewhere and expect the same demand due to this lack of exposure.
So, what can be done to improve the sharing economy?
#1) Cooperative sharing
One novel idea to combat the power of these platforms is “platform cooperativism.” The transition to a cooperatively owned peer-to-peer network has been pioneered by the Transunion Car Service in Newark, New Jersey. The service, which bears many similarities to a traditional taxi service, runs 24/7 and uses a mobile application similar to Uber to facilitate customer-friendly transactions. Passengers are able to pay wirelessly, the barriers to entry in the service are lower than those of traditional taxi services, and – most strikingly – it is owned entirely by a union.
The TCS combines many of the strengths of peer-to-peer networks with those of more traditional yellow taxi lines – the convenience of the former, with the regulation and worker-friendliness of the later. It is an important step forward, and hopefully will give rise to further publicly-owned sharing services to combat Uber and Airbnb.
#2) Government regulation
As discussed previously, there are a number of lax regulations in place for Uber and Airbnb, a vast majority of which are far less restrictive than those in place for traditional transportation and rental services.
One of the lost intriguing and damaging examples of this is Uber’s ability to evade taxes outside of the United States. Through a complicated network of subsidiaries and headquarters based in tax-exempt locations, a vast majority of Uber’s international revenue is not taxed by local governments, nor the US. Uber’s $66 billion valuation is certainly impressive, especially since the company has remained private since launch, but a majority of its income isn’t taxable in its home country.
How should government bodies rectify this problem?
First, the government’s role in the sharing economy should be to promote the interests of individual providers and consumers beyond those of the wealthy network platforms that serve them. It should work to ensure providers have more say in the market price than they currently do, and should place limitations on the service fees charged by the platforms to guarantee the integrity of the industry. The primary goal of the government should be to remove the sharing economy (for transportation services, anyways) from a state of near-perfect competition, so that riders can differentiate themselves on a non-price basis in clear, distinguishable ways without unfair regulations of the platforms.
Secondly, the federal government should more strictly define the taxability of these platforms, and close tax loopholes that allow these businesses to leave large amounts of revenue unchecked. Below-cost and near below-cost pricing should be closely monitored so that traditional businesses are not driven out of the market. The playing field should be levelled, and more even regulations on sharing services will help to balance the needs of consumers and employers both in the sharing economy and in traditional markets.
The sharing economy presents a multitude of exciting opportunities and frustrating obstacles for today’s tech-savvy world. Among its strengths are its ability to provide untapped value to renters and new (cheap!) goods and services to consumers, create job opportunities, and positively impact the environment. Meanwhile, in its current state, there is also far too much power given to the platforms, which tend to be monopolistic, it puts great pressure on traditional businesses, and there are ill-defined regulations for taxation and licensing.
Yet these issues can be alleviated by intelligent government intervention and regulation, and by the promotion of public, worker-owned sharing services that provide quality service and important tools for employees.
Ultimately, the benefits of the sharing economy truly do outweigh the costs, and with the aforementioned amendments to the system in place, the possibilities for sharing are boundless.