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Economics of the Sharing EconomyResearch Paper

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¶ … Sharing Economy

Last night 40,000 people rented accommodation from a service that offers 250,000 rooms in 30,000 cities in 192 countries and they chose their rooms and paid for everything online via AirBnb (The Economist, 2013). The sharing economy is one of the trends that is likely to expand quickly into many different industries. People are now able to rent out their homes or apartments to other individuals through AirBnB and has impacted the hotel industry worldwide. The central concept is that technology has allowed people to share their things to gain extra income. The same can be said of the taxi industry and the introduction of Uber and similar services. In this service, people not only share their stuff (cars) but they also share their time and labor. Uber allows for a platform that allows people to drive other people around for money.

The sharing economy is a buzzword that describes the phenomenon of companies that run, as a business model, operations that match buyers of services with providers of services. The examples with the most substantial amount of puclicity are AirBnb and Uber, with accomodations and transportation respectively. The reason these companies receive the attention that they do is because their business models are relatively unique. There are two points of uniqueness, though these points are related. The first is that these businesses engage untapped supply in the markplace, and the second is that this supply completely upsets the normal paradigm for delivery of these services.

The Economics of It

One of the biggest appeals of Uber and AirBnB is that they feature the use of capacity that is presently underutilize or entirely unutilized. AirBnB began life with the concept of allowing people to use spare bedrooms or other unused space. They would rent this space out to people who sought a place to sleep. This was not originally intended to be direct competiion with hotels, but rather as an attempt to tap into both latent demand and latent supply. Guests who want a room in someone's house with a toilet down the hall are simply not the same market as those who stay in an international-chain hotel.

The economics of both AirBnB and Uber are compelling. The way that our society is structured, we have a tremendous amount of capacity that we are paying for, but which sits unused. With our vehicles, this is plain to see . Most adults have their own car -- the rate of vehicle ownership in the U.S. is812 per thousand. This indicates that most adults have a vehicle of their own, yet at most they only spend a few hours a day in that vehicle. Uber goes beyond the vehicle; it places a value on time. A person might only work 8 hours in a day, and then spend the rest of their waking hours doing nothing productive. In terms of asset utilization, neither the worker nor the vehicle is operating anywhere near maximium efficiency. In many sitautions, neither needs to, nor wants to. But for those who wish to make more money, in particular to pay for the cost of the vehicle, there is merit to the idea that if they use their time more efficiently in the economic sense, and their vehicle as well, that those people can make a more economically efficient decision.

The same goes for AirBnB. Where a car sitting, parked, doing nothing, is an asset that ultimately is perishable and is thus being squandered, that is the same situation with a spare room in someone's house. In most western nations that experienced a baby boom in particular, there was a glut of housing that was occupied by people returning from the Second World War. What ultimately happens, htough, is that people buy a house for an entire family, but the family grows up, and they are left with more space than they need. AirBnB fills that gap, allowing that space to make economic contribution. The result is more economically efficient -- space that would otherwise go unused is now being put to good use.

So the economic case for the sharing economy is quite clear. Where there is unused capcity, the sharing economy will help find ways to fill it. Working just with these basic principles, one can envision sharing space in a storage locker, or some other such means of monetizing something that is privately owned. Furhtermore, the barriers to entry and exit are much lower with the shared economy. The arrival of out-of-town family simply means that you can take down your AirBnB listing for a few days. You can Uber for an hour a week, or as a full-time job. Ultimately, more power rests in the hands of the people, because they can enter and exit the market easily.

Competitive Advantage

The gives Uber and AirBnB a competitive advantage over their competitiors in the taxi and hotel industries. The taxi industry in most cities is heavily-regulated, and there is usually a set number of licenses to ensure that drivers are able to get enough fares to earn a living. The lack of competition is bad for consumers, but good for the taxi companies. Uber breaks up that monopoly. Without the fixed costs associated with maintaining a taxi company and a fleet, Uber drivers can also be more flexible in the service they provide, and there are times when they will be able to undercut the taxis on cost. Just increasing the supply in the marketplace, aligning it more closely with demand, will reduce costs.

It is the same in the hotel industry. Hotels have high fixed costs and a perishable product. AirBnB owners are utilizing space that they are already paying for. The incremental costs are low, so they can be much more competitive on price. The quality of the offering will vary, but with low costs, they can fill in gaps in the marketplace. Hotels have to come in at a certain price point just to cover their costs, and AirBnB puts the hotel industry at a disadvantage. Again, though, this is to the benefit of consumers, and the providers of AirBnB accommodation, who have the opportunity to earn income from passive ownership of a property. It is empowering, and even more so when the superiority and efficiency of the business model is taken into consideration.

Social Disruption

If AirBnB and Uber are simply about finding a way to make unused capacity unsed again -- creating economic efficiency where there was none before -- why are these services subject to so much controversy? The answer lies in a society that emphasizes the rules, regardless of why those rules exist. It is easy for many with our society to simply cite the rules and preach adapation to them. No thinking is required with this thought, and for the most part people benefit from this system. The rules are written in legislatures and affirmed in courts, and ultimately most rules affect very few people. So many in society simply come to accept rules, and they have an implicit trust that the rules exist for a reason, and that reason was entirely rational and considered the interest s of many stakeholders. If that is the nature of law, then surely, the logic follows, the law should not be questioned.

The problem is that ultimately that is not the nature of the law. Laws are generally crafted by those with a specific interest, and wherever possible the laws will reflect those interests. There are definitely situations where the sharing economy has revealed the flaws in this system. Taxis and hotels are heavily-regulated industries. Nobody questions the need to regulate these industries. They sell services primarily to people from out of town, and people from out of town are the most vulnerable to scams or other such issues. Regulation is necessary to preserve the tourism industry and to reflect the abilty of government ot guarantee a safe environment for tourissts.

But the sharing economy challenges that paradigm. That paradigm holds a strong element of caveat emptor. The buyer has to know that there is a fair bit of risk and that only the forces of the market will truly lend support when something goes wrong. But ultimately, the sharing economy systems are designed with the idea that the end user will be in a position that they are on their own. The sharing economy does little to solve that.

Interaction between Customer and Vendor

Another interesting thing that comes out of the sharing economy model is that it shifts the relationship between the vendor and the customer. Traditionally, this relationship is characterized by a complete segregation of roles, and is governed by sets of laws. Both parties engage in what is strictly a business transaction, and there is a highly impersonal element to it. The sharing economy is sometimes like that as well -- Uber uses a lot of professional drivers, and some AirBnB owners take a hands-off approach and run their flats like… [END OF PREVIEW]

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