The Real Innovation of the Sharing Economy

By Max Gulker

The so-called sharing economy has been the topic of much discussion in recent years, but there is still confusion over what it includes, what makes it different, and the importance of these differences. This article seeks to clarify these questions by evaluating the characteristics of online platforms commonly associated with the sharing economy. The frequent platitudes about the sharing economy changing “perceptions of ownership“ and “creating global communities“ tend to obscure what is truly important about these platforms, and the term “sharing economy” itself can be misleading. But the online, peer-to-peer matching of buyers and sellers does have important implications for buying and selling goods and services.

The website Investopedia provides a definition of the sharing economy that broadly captures most people’s understanding: “A sharing economy is an economic model in which individuals are able to borrow or rent assets owned by someone else. The sharing economy model is most likely to be used when the price of a particular asset is high and the asset is not fully utilized all the time.” This article will consider three features commonly found in that and other definitions:

  1. Peer-to-peer matching: platforms allow individual buyers and sellers to find each other, rather than one side of the market being a large firm
  2. Use of idle resources: goods or services involve the use of a physical asset or someone’s time that would otherwise be underutilized
  3. No change in ownership: people pay for access to a good or service rather than ownership

In a recent report on the sharing economy, Bank of America categorizes widely used online platforms that differ from traditional business-to-consumer models in the way goods and services are provided. In the table below, I have grouped these categories into those commonly, sometimes, and usually not associated with the sharing economy. This taxonomy serves as a guide for the discussion of the three features listed above.

The Power of Peer-to-Peer Matching

The internet has drastically reduced search and information costs in many areas, perhaps nowhere as importantly as the efficient matching of buyers and sellers. While we used to think of sellers as established businesses with full-time workers, the rise of peer-to-peer matching platforms has blurred this definition. These platforms have significantly lowered entry costs in many industries, as the table above demonstrates. By avoiding traditionally high costs associated with search, advertising, communication, and payment, individuals seeking supplementary income in their spare time can often compete with established firms.

The platforms most commonly associated with the sharing economy are Uber and Lyft (rides), Airbnb (lodging), and TaskRabbit (other services). They are all peer-to-peer in that they connect individual consumers to individual service providers. Interestingly, platforms enabling the sale of pre-owned or custom-made goods, such as eBay and Etsy, predate widespread use of the term “sharing economy” and are only sometimes included in the discussion. I argue below that this rests on a false distinction. The only type of platform sometimes included in discussions of the sharing economy that is not peer-to-peer is rental services such as Zipcar or Citi Bike. Their inclusion as an example of the sharing economy might be the consequence of successful branding, as these services are often labeled “car sharing” or “bike sharing.” In reality, these are simply rental agencies rendered more efficient by information technology.

It is peer-to-peer matching technology that truly separates platforms commonly or sometimes associated with the sharing economy from their pre-internet counterparts.

The Benefits of Using Idle Resources

The car owner making extra money at night as an Uber driver and the homeowner renting out her second bedroom on Airbnb have become ubiquitous archetypes of how the sharing economy has changed the world. The entry of these individuals into the car-service and lodging markets is made possible by the peer-to-peer technology discussed above. Presumably drivers could have started their own part-time car services before Uber, but the cost of finding customers and advertising would have been too high. This is a highly important development in many industries. Putting people’s time and capital assets to more productive use unambiguously increases overall economic wellbeing (though much like free trade, it also causes disruptions for some traditionally employed in these industries).

The use of “spare” or “idle” resources characterizes many but not all of the service providers in these industries. In a 2015 study, Jonathan Hall of Uber Technologies and economist Alan Krueger report that 57 percent of Uber drivers work 1 to 15 hours per week, 29 percent work 16 to 34 hours, 9 percent work 35 to 49 hours, and 5 percent work over 50 hours. In all likelihood, well over half of Uber drivers have a different primary source of income, though a small number do use it as a full-time job. However, many people rely on these platforms as a source of income even if not their largest source. A 2016 Pew Research Center study reported that 56 percent of workers on sharing-economy platforms characterized the income as “essential or important” while 42 percent said it was “nice to have.”

When assessing the importance of these new uses of “idle” resources, some overly excited commentators disregard the “no free lunch” rule of economics. One must remember that entering these markets still involves costs, even if a car would otherwise be sitting in a garage or a room would be empty. Renting a room in one’s home on Airbnb, for instance, involves a certain level of required upkeep, the sacrifice of privacy, and the risk of letting someone relatively unknown into one’s home. Costs similar to these likely explain why, as described below, some platforms involving more actual sharing have failed.

Finally, some perspective on the impact of these new models on the broader economy is in order. A 2017 Bank of America report provides data on global revenues from sharing-economy platforms and the traditional businesses with which they compete. The chart below summarizes the results. Car sharing, home sharing, and secondhand goods all have less than 10 percent shares of their respective markets. Significant growth in these shares could continue, though by how much is uncertain.

 

But Where’s the Sharing?

Many observers have failed to notice how little sharing actually happens in the mainstream “sharing economy.” Terms such as “collaborative consumption” and “access rather than ownership” are thrown around, but seem largely to describe a vision that has not come to fruition. Starting around 10 years ago, many peer-to-peer sites sprung up that aimed to facilitate the actual sharing of goods in neighborhoods. The power drill became the classic example, with many noting the wastefulness, at least in theory, of everyone owning separate drills when they are so rarely used. However, of seven startups in this space between 2007 and 2010, only one, NeighborGoods, still existed in 2015, with about 10,000 active users.

Observers have made a tempting but incorrect logical leap by connecting this idea to Uber and Airbnb, where we all “share” the car or room. However, they are simply describing a longstanding business model where an entrepreneur uses capital assets to provide a service. This type of sharing describes traditional taxis or hotels just as much as it describes these new platforms. In the table above, when one excludes cases where “access rather than ownership” describes a service industry both before and after the new technology, one is left only with platforms that do not have the peer-to-peer hallmark typically associated with the sharing economy.

Internet-based platforms have connected individuals to each other for almost two decades. The real innovation at the heart of what’s been named the “sharing economy” is the realization that such peer-to-peer matching can transform markets for services such as transportation, lodging, and general errands. Those who carelessly speculate that these platforms will change the role of private property will inevitably be disappointed—the so-called sharing economy is another way that free market forces have evolved to put that property to its best use.

 

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Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max 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.