In recent times, there have been an increasing amount of rapidly growing businesses that use a peer to peer business model. This business model involves business transactions between individual producers and consumers to satisfy a need rather than a larger company. In this blog post, I will analyze why startups such as AirBnB and Uber are so wildly successful, as well as a few of the challenges that they face.
From my personal research, I have discovered that the success of the shared economy can be derived from a few key advantages over other business models. With this business model, services are uniquely personal, reasonably priced and extremely convenient. Rather than having giant companies that dominate a business sector, the shared economy allows for many individuals to collaborate and form a business. For example, if you decide to become an Uber driver, you can become a easily become a micro-entrepreneur without any large regulation barriers in your way.
The rental economy maximizes the use of a given resource, making use of unused potential for usefulness.
Applying this same idea to conventional goods and services like hotels through AirBnB and car rides through Uber proves to be an ideal solution for many people. It makes use of a preexisting, under-exploited asset and uses it to provide an alternative source of income, especially to the unemployed.
For example, Jamie Wong, co-founder of Vayable.com said,
“I moved out of my apartment in central San Francisco, rented a cheaper annex in a friend’s home, and ‘airbnb-ed’ my apartment for $200 a night and earned about $20,000 in a year. It enabled me to bootstrap my start-up. Airbnb was our first round of funding!”
This extra money has positively impacted the lives of many.
“This cycle of opening up excess capacity, INCs building platforms for participation, and connecting billions of diverse Peers to create and collaborate together, is the path to abundance.”– Robin Wright: Cofounder of Zipcar
The golden key that enables all of these micro-entrepreneurs to be successful is the platform that connects willing providers to a large accessible market. For example, AirBnB gives individual users the ability to rent and profit themselves. A large number of both consumers and producers proves to be an advantage because it creates an abundance of opportunities. For example Uber has 40 million monthly riders as of 2016.
Transitioning to the collaborative economy represents an emotional change from the traditional capital market. The capitalist mantra is that every action is completed out of self interest. If you buy fries at Mcdonalds it is highly unlikely that you will share these fries with a stranger, even if you are too full to eat them all. In fact, you will likely throw out these extra french fries because it is weird to ask a stranger if they want your extra fries. The shared economy will maximize the use of these uneaten fries and allow you to sell these unused assets.
The Disadvantages and Challenges
The biggest disadvantage of using a shared economy are the difficulties associated with managing a large market where both the producer and consumer may be untrustworthy: a logistical nightmare.
For example, a disruptive and rude passenger can threaten the safety of the driver. Take a look at this video of a calm uber driver and a passenger released on April 4, 2017. I must caution you that they have naughty mouths. The passenger clearly offended and disrespected the driver, which led to an unpleasant experience. Another problem arises if the driver or passenger does not show up. However, these problems are ameliorated by a cancellation fee and a ranking system as explained in this video.
One of the problems of using Uber is that there is falling pay for Uber drivers. Uber takes 20% cut for Uber and a $1.50 charge for a safe rides fee. Here are the rates that the passenger has to pay for an UberX in Toronto as of April 2017.
The problem here is that the users of Uber have very little control over the prices set. They have to agree on a fixed price whether they like it or not in order to use the service. This is a problem for drivers who want more pay.
Section on Monopolies:
Under the current circumstances, shared economy markets tend to favor large monopolistic platforms which divide and conquer as a business strategy. For example with Uber and Lyft, Uber is much larger, with a 87% market share. The reason behind this is because consumers would rather have access to a larger market, and do not have time to compare 2 ride sharing services, so they will just pick Uber and stick with it. Uber being a behemoth is less than ideal for consumers and producers because as individuals, they have very little democratic power to change regulations. For example, Uber has a non-negotiable user agreement that is difficult to change. In order to improve this situation for consumers in the future, companies should provide a better way for individuals to vote and change certain policies.
Although I’ve just stated that it is difficult to change the policies and regulations for platforms, I would like to offer another perspective, that proves that this disadvantage of adopting a shared economy is not as bad as it seems. It turns out that companies indeed do change their policies to protect its users. Now gather around and listen to a story of why AirBnB implemented insurance policies. While most AirBnb gigs are trouble free, there are some nightmare cases. In one case someone’s house was ransacked and the victim made a blog post that went viral. This is an example of how sketchy consumers who use this platform can harm the renter.
“They smashed a hole through a locked closet door, and found the passport, cash, credit card and grandmother’s jewelry I had hidden inside. They took my camera, my iPod, an old laptop, and my external backup drive filled with photos, journals… my entire life.”, explained a blogger named EJ
This was fairly bad for AirBnB’s public reputation, so they responded by updating their policies to add a 50,000 dollar insurance for the renter. Read more here. Later on, they developed a 1,000,000 dollar guaranteed insurance policy, to ensure that AirBnB renters will be protected.
Earlier, I explained an opinion on how behemoth monopolistic platforms provide little power for consumers to provide input, however this is an example of how the company responded well.
Therefore, while the regulation of the shared economy is currently in a grey area, as these types of businesses evolve, an improvement would be to develop a system that better addresses the individual needs of its users.
The Role of the Government in the Shared Economy
According to a report released in Ontario about how to regulate a sharing economy, it can be difficult to regulate because of challenges to consumer safety and security. Lack of regulation from these services could result in bad service quality and lack of protection for the consumers. Additionally, a lack of health and safety regulations could put consumers and providers at risk.
“It’s now about what fundamentals we can put into place for this rapidly growing sector of the economy, and the appropriate role for the government to play,”—Karl Baldauf, vice-president of policy and government relations at the Ontario Chamber of Commerce
After a meeting with government workers and decision makers for the City of Toronto, they released a summary document explaining what needs to be done. There must be a distinction between a business owner and a micro-entrepreneur so that they can both be taxed fairly. It seems that the government is still working on the kinks of this new type of business.
Applying economic principles to Uber
We can now apply economic theories learned thus far to this idea of the shared economy. By maximizing resources, like using and Uber car, or a AirBnB, there is an increase in supply, as there are additional sources where a service can be provided, the supply curve is shifted to the right. As a result, the equilibrium shifts to a point where the quantity demanded is greater and the price is cheaper. This is excellent news for consumers, because fast and cheap car rides are not only more available, they are also cheaper. Clear evidence of this is supported by Oxford alumni Carl Benedikt Frey who published a paper explaining the impacts that Uber has had on the taxi industry. There has been a fall in income of about 10% for salaried drivers, as well as a 50% rise in the number of self employed drivers in the city. As for the price, a Toronto Star article explained an experiment done where an Uber and a taxi were used to both go from point A to point B. The Beck Taxi costed $67.50 and took 43:31 minutes whereas the Uber took $41.67 and took 31.58 minutes. Of course, the scope of this experiment was small, however it does shed some truth about how Ubers can be cheaper than taxis.
The Impact on Competitors of the Sharing Economy Business
Uber has been a subject of controversy among many Taxi companies around the world because of claims that they bypass many licensing and safety laws that allows for unfair competition. For example, on June 11, 2014 there was a large protest in many major European cities where they blocked off many roads. They were against Uber drivers, for the aforementioned reasons, as well as the fact that Uber drivers did not have to pay regulation fees and that they were threatening the livelihood of taxi drivers.
Although I’m neither a taxi or Uber driver, to tackle this issue, I would have Uber consume all taxi industries around the world. This may sound over simplistic, but in terms of maximizing people’s time and developing an efficiency with a decreased idle to driving time ratio, Uber’s complex sorting algorithm applied to an even greater market will be the least wasteful use of people’s resources. I believe that this will very likely happen in the future, because it is difficult to compete with Uber’s massive accessibility and efficiency.
After analyzing the logistics, advantages, disadvantages and effects on competing companies, I believe that the sharing economy can benefit both producers and consumers. Producers are able to find new uses for their pre existing assets and find a new source of income. Consumers will have access to a relatively cheap and uniquely personal service or good. Both sides of this peer to peer business will benefit from a large platform that allows for convenient market access, makes communication easy and sets up a reasonably well structured system where they can perform fast transactions. The vast potential created from these new opportunities are well worth the small risk of potentially having a bad customer or producer experience. Tax, policies and regulations still have to be more thoroughly developed by governments to better create a standard to understand and regulate this sharing economy. This is because it is a game changing model that is likely to be used more frequently in the future. The next few years will prove to be exciting as we see new peer to peer market platforms introduced into our lives.
Written by: Michael Lin