Sharing economy offers flexibility and efficiency to consumers

Uber app on smartphone

The rapid growth of the sharing economy has generated a great deal of interest in both the private and public sectors. A 2014 PwC report estimates that the sharing economy will grow to $335 billion in value by 2025, up from $14 billion in 2014. According to one definition, the sharing economy is “the peer-to-peer-based activity of obtaining, giving, or sharing the access to goods and services, coordinated through community-based online services”.[1] A 2016 Pew Research Center survey found that 72 percent of survey respondents had used sharing economy services, although 73 percent were also unfamiliar with the term. In a new report, Center for Technology Innovation fellows Niam Yaraghi and Shamika Ravi compile the latest research on the sharing economy to identify its benefits to consumers and its potential regulatory issues.

Flexibility and efficiency

Using online platforms that match customers and suppliers, sharing economy services like Uber and Airbnb can achieve greater efficiency than traditional businesses. Cars and rooms can be used by their owners when not rented out, while taxis and hotel rooms often spend time empty while searching for their next customer. Many taxi drivers also work full time while an Uber driver can choose to work during times of periods of high demand to earn higher fares. Uber’s surge pricing mechanism raises fares in response to high demand to attract a greater supply of drivers. The sharing economy offers consumers the flexibility to access goods and services only for as long as they are needed.

Regulatory concerns

Sharing economy businesses have been criticized for ignoring regulations that govern traditional industries. Avoiding these regulations can yield substantial savings: an estimated 35 to 40 percent of operating costs for taxis comes from regulatory compliance. Taxis are often required to post how their fares are calculated, while Uber does not disclose its pricing algorithm. In addition, sharing economy businesses must combat bias on their platforms, both from their human buyers and sellers and in algorithms can reflect and amplify human biases. Using characteristics such as race and gender in online profiles these can impact pricing or lead to sellers rejecting customers. Omitting identifying information when unnecessary to complete a transaction can reduce discrimination in online platforms.

The global reach of Airbnb and Uber has also lead to concerns that these businesses will become monopolies. The online platforms built by these companies benefit from network effects, where a large number of customers attracts more suppliers and vice versa. Large platforms make it more difficult for new startups to compete, but the cost for customers or suppliers to switch between platforms or to traditional businesses remains low. The main switching cost for suppliers comes from building a reputation based on customer reviews on each platform.

To conclude their report, Ravi and Yaraghi make some recommendations to pave the way for the growth of the sharing economy. Much of its past growth stems from the trust built up between customers and suppliers, and sharing economy businesses can maintain this trust through self-regulation. One example of this would be for companies to share data with regulators. Imposing regulations that exist for traditional businesses would protect incumbents by raising barriers to entry for competitors. Furthermore, consumers should have control over how companies use their data. The sharing economy seems likely to grow with the level of trust between regulators, suppliers, customers, and businesses.

[1] Hamari, J., Sjöklint, M. and Ukkonen, A. (2016), The sharing economy: Why people participate in collaborative consumption. J Assn Inf Sci Tec, 67: 2047–2059. doi:10.1002/asi.23552