Why buy a car if you could simply ride on someone else’s car, much like a taxi? Why live in hotels when you travel overseas when you could save costs by living in someone else’s home? Such are the questions that mobile applications like Airbnb, Uber and Turo have posed to users as they seek to develop a business around the concept of a Sharing Economy.
The Sharing Economy or Collaborative Consumption is built under the notion that access is more important than ownership. It bridges the gap between supply and demand but instead of transactions enacted by firms previously, most who offer their services are everyday individuals who have resources that they do not maximise.
For a quick introduction to the sharing Economy watch this short video done by my graduated students.
For example, California-based Airbnb lets people rent out their spare rooms to others for extra income. Turo allows others to rent your cars when you are not using them. Uber, already seen in Singapore, allows individuals not registered as taxi drivers to play similar roles, driving people around for a fee. Such peer-to-peer rental schemes provide extra income for owners and can be less costly and more convenient for consumers.
The current digital technology has made it effortless to aggregate supply and demand. Smartphones and mobile applications make it easy for GPS satellites to track for the nearest room and car available for rental. Social Media and online rating systems make it easy to establish trust. Finally, the ease of internet banking allows quick and effective transactions. Such efficiency have created the “peer-to-peer economy” or the “sharing economy”.
It is no coincidence that many of these apps were made during the crisis years of 2008-2012. A sluggish economy encourages sharing as people search for alternative sources of income and aim to reduce costs. Moreover, it is also environmentally friendly as it encourages more efficient use of available resources, discouraging overconsumption. It is also no surprise that according to a study conducted by PWC consulting as shown above, those who are most excited about the sharing economy belong to the millennials. These individuals were born into the digital age and grew up with social media, thus their increasing involvement in the labour force is likely to impact the future of consumption. Increasingly, it may induce a shift from ownership to access.
As seen from a study by PWC above, by 2025, the 5 key sharing economy sectors could generate revenues of up to a staggering $335bn. Airbnb totals more than 155 million guests annually, 22% more than Hilton Worldwide, a multinational hospitality company. Five-year old Uber already operates in 250 countries and its market capitalization as of 2015 was valued at a startling 41.2 billion, more than the market capitalization of American Airlines, Genting Singapore and United Continental. The point is that the sharing economy has massive potential, moreover the industry works under the veil of the network effect, the more users utilize such apps, the bigger its area of expansion.
Impact on Market Structures
The key impact on market structures is the reduction of barriers to entry for households with excess resources. But there is a paradox in the sharing economy. It both increases and reduces competition. For example Airbnb allows any willing person to rent out his/her room or whole home to outsiders, becoming a source of competition to existing hotels. This reduces the market dominance of big hotel chains and reduces prices to make the market closer to achieving allocative efficiency. However, the platform of Airbnb itself will becoming increasingly dominant because of the network effect and network economies of scale . Indeed Airbnb can be said to be a near international monopoly when it comes to short-term rental of private accomodation. For Uber, in Singapore, it is at least challenged by Grab, thus it may result in an oligopoly situation. Whatever the case, whenever there is innovation disrupting the relevant markets, the consumers win! So cheers! Sharing is indeed caring =).
Co-authored by Deng Quan and Gilbert