– September 8, 2017

In a Daily Economy post this week, Paz Gomez correctly points out that the sharing economy (which includes decentralized platforms such as Uber and Airbnb) is an affirmation, rather than a rejection, of free market capitalism. I’ll go even further: the sharing economy, at least in its most currently successful applications, has nothing to do with sharing at all. Someone owns or leases an apartment or car and uses that capital asset to provide a service to a customer at a mutually agreed-upon price. Mind-blowing, isn’t it?

What’s really going on is something less radical, though no less important, than what overzealous proponents imagine. Sharing-economy platforms use information technology to dismantle some of the economies of scale that previously prevented small entrepreneurs (whether full-time or in their free time) from competing with big firms in some industries. Specifically, they make it much more efficient for small entrepreneurs to inform potential customers of their existence and accurately signal a positive and honest reputation.

Suppose it’s 1980 and I want to rent out a spare room in my apartment a few weekends per year. I could put up fliers around town, but I’m not sure anyone would jump at the chance to stay with someone whose only qualification is access to a Xerox machine. It might make more sense to put the word out among my friends, establishing trust through my (pre-internet) social network. But the number of potential customers I’d reach is extremely limited. Luckily, it’s 2017 and a platform such as Airbnb makes it easy for customers not only to find me but to trust me through the comments and ratings of previous customers.

Sharing-economy platforms provide robust new competition in the markets for many services, but I don’t see them rendering many existing business models obsolete (yellow cabs are a coercive, government-sponsored monopoly, not a business model). It may be a painful adjustment process for some large incumbents, but successful ones will learn to exist alongside the new competition.

People tend to get hung up on the fact that sharing-economy platforms allow people otherwise employed but with spare resources to put those resources to use. This is a positive development, but once again just a consequence of the reduction of economies of scale in some industries. It’s also important to remember that this decentralized business model does not work everywhere. If I want to send a package to the West Coast, FedEx has invested in big, expensive planes that reduce the average cost in a way with which an individual could never compete.

I’ve used the term “sharing economy” throughout this post, but it’s not ideal. AIER founder E.C. Harwood always emphasized the importance of accurate terminology. What’s known as the sharing economy constitutes a set of important innovations, but they are just another example of free markets and technology evolving together. I’m not so grandiose as to think I can single-handedly change a media buzzword, but the first step toward any solution is admitting our problem.


Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research focuses on two main areas: policy and technology. On the policy side, Gulker looks at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker is interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy. Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.
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