SHARING ECONOMY

-Public Administration Management-

Simón Acuña López

Ramón Cañas Panero
Index

Index 2

What is the collaborative/sharing economy? 3

Two-sided markets & Business models 4

Economic analysis 4

Pros and cons of the sharing economy 6

Challenges for regulations 7

Experiences 8

References 9

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What is the collaborative/sharing economy?
The sharing economy, also known as collaborative economy, peer economy, access economy or
collaborative consumption, is an economic model often defined as a peer-to-peer (P2P) based activity
of acquiring, providing or sharing access to goods and services that are facilitated by a community
based online platform. Typically, a company or group acts as an intermediary to facilitate consumers’
ability to rely on each other. It covers many sectors and provides new opportunities for everybody,
allowing individuals and groups to make money from underused assets (Airbnb), the exchange of
services (Task Rabbit) or the recirculation of goods (eBay).

Companies in the collaborative economy are often disruptive to established businesses and many have
experienced rapid revenue growth. They usually rely on the digital space and smartphone apps to
connect buyers and sellers. Online reviews and, in some cases, background checks facilitate trust to
make these exchanges possible.

Stimulated mainly by the growth of Uber, Airbnb and other startups unicorns, it is expected that the
sharing economy will grow from $15 billion revenue in 2015 to a forecasted $335 billion by 2025, so
they potential is enormous. In addition, the number of users is estimated to double in a period of 5
years just in the US, as it is detailed on the figure below. The sharing economy is opening up a
number of interesting possibilities across different economic activities and it is actively redefining our
daily lives. The sharing economy is inherently changing the future of work, production and
collaboration, and on a personal level, changing our concept of ownership and our attachment to it.

Figure 1: Number of sharing economy users in the United States from 2016 to 2021 (in millions). Source: Statista

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Two-sided markets & Business models
These are those markets in which a platform serves at least two distinct customer groups (for
example, an online newspaper, which serves readers (subscribers) and advertisers). Sharing economy
usually presents this condition, and joins at least two types of users, benefiting both sides differently.

Sometimes the prices of the services given are set by the platform, but other times those prices are set
by the users and are regulated by the platform, or not even regulated at all (that means that it would be
standardized by what is called as “the market theory” offer-demand).

The economic revenue for the company that sets the platform is not always clear, and companies use
different strategies in order to generate incomes. Some platforms use advertising in their web pages,
so that they don't need to charge any of those sides of users involved. However, that is not always
possible, thus companies tend to use other strategies such as:
➔ Charging both sides
➔ Subsidize one or more sides (free access to one or more than one of those sides)
➔ Offering extra services or premium memberships

Figure 2: Representation of two-sided markets. Source: Business Model Toolbox

Economic analysis
Collaborative economy businesses are appearing and spreading rapidly and there is a rational reason
that justifies this tendency. So, why does collaborative economy appear?

The rise of the collaborative economy is largely attributable to technology-driven solutions which
address market failures and target the demands of consumers in a dynamic market.

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 Figure 2: Main drivers of collaborative economies. Source: Deloitte Access Economics

Essentially, the sharing economy emerged because developments in information and

communications technology have significantly lowered transactions costs. For example, owners
of under-utilized assets can more easily find users willing to pay for the use of their assets, allowing
access to excess capacity, potentially from users around the world.

Platforms also provide coordination benefits, and reduce bargaining costs as individual contracts
may not need to be negotiated for every transaction.

Another reason for the appearance of the sharing economy is that it allows owners of idle assets to
recover the cost of time, space or money allocated to an asset that would otherwise have not been
used, and it gives renters of those idle assets the opportunity to consume the services of those assets
for less than they would need to spend to purchase and own the asset outright.

Finally, the occurrence of the social media and online reviews have facilitated the growth of the
collaborative economy by breaking down barriers, encouraging transparency and allowing people to
connect with others involved in the transaction. This allows for the ‘trust’ required in the trading
relationship with people who would otherwise have been strangers.

So far, the collaborative economy has been most prevalent with regards to the consumption of goods
and traditional services such as accommodation, transport, and personal and professional
services. The following may have contributed to their success:

➔ Collaborative economy businesses tend to thrive when they connect people with assets that
are not fully utilized, but which they already own, with those who do not have these
assets.

➔ Collaborative economy businesses that meet a market demand for an improved service.

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 ➔ Collaborative economy businesses that achieve network effects; where the number and
density of participants leads to greater outcomes for all parties involved.

Pros and cons of the sharing economy

The apparition of the sharing economy had different benefits and drawbacks that are considered in the
following lines:

On the one hand, there are several pros:

1. It empowers citizens and makes them more productive: Sharing economy facilitates jobs for
individuals while giving them the power to give their own terms and have more flexible
working hours. Moreover, people of the community are encouraged to be more productive by
sharing their time as well as unused items at home. It also strengthens the community as a
result of sharing.

2. A more sustainable use of resources: Human beings accumulate possessions such as cars,
properties and gadgets which at one point or the other, will be used lesser and lesser. With a
sharing economy, private owners can offer their vehicles or unused rooms to others for a fee.

3. Economic benefits for users: the apparition of sharing economy businesses had reduced the
price of the goods and services subject of sharing, as the transactional costs are lower and
some regulations are avoided. Also, traditional business models had to improve their own
service and reduce margins. As a result, the alternatives of choice are higher and the access
barriers lower.

4. It reduces unemployment: sharing economies companies provide a source of incomes for

people with seasonal jobs (only summer or only Christmas) to cover the rest of the year.

On the other hand, it also has some setbacks:

1. It results to loss in government revenues: People who do business over the internet offering
services like legal writing and Web Development are not regulated, so not all who earn an
income pay taxes from their earnings online which should have been added to government’s
tax revenues.

2. Worse conditions for workforce: People who work under a shared economy are deprived of
the benefits accorded to full-time employees such as paid leaves, sick pay, bonuses and they
are often underpaid.

3. Lack of protection for the consumer: the slowness in the adaptation of the regulations to these
new businesses could leave uncovered by the consumer law in some aspects, so they do not
know who to turn in case of claims or complaints on the service.

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Challenges for regulations
The current rationale amongst companies is to innovate first and then allow regulation to catch up
with the new technology and marketplace. Entrepreneurs largely believe that although important in
protecting the public from fraud and dangerous conditions, the regulatory apparatus moves far too
slowly and reaches inadequate compromises. They also argue that many regulations are in place
simply to maintain the status quo and to protect certain industries from new competition.

There are a few regulatory challenges that need to be addressed by governments to tackle the new
scenario that appeared after the creation and development of businesses based on sharing economy:

Privacy and data ownership: most of the sharing economy businesses collect data that is used for
several purposes and can be even sold to third parts. Data can be used for to increase the efficiency of
the services, but it could be used in other practices such as price discrimination against some clients or
infer the highest price that a specific client is willing to pay for a determined service. What is more, in
some services like ride sharing, it is not clear if the data collected belong to the drivers or to the
passengers. Therefore, some companies like Uber has already added a clause in their privacy
agreements that asks passengers for permissions to use their data.

Price discrimination: some of the sharing economy companies like ride sharing services are based
on machine learning algorithms which allow price discrimination with a high degree of accuracy, but
it not clear how much price discrimination is fair or legal. Therefore, it is a reasonable request to ask
for disclosure of the pricing algorithm, or at least the elements that affect the outcome of the
algorithm. The fact that taxis must disclose their pricing method (it is posted on the window of every
taxi) makes it much easier to argue for the same regulation for Uber or BlaBlaCar.

Racial and/or gender discrimination: Using names and photographs in profiles can foster greater
trust in online transactions, but it can also lead to gender and race-based bias. Examples are found in
Airbnb that had to face racial discrimination complaints from African-American and Latino renters or
EBay, where identical products were purchased for lower prices when displayed with a black hand vs.
a white hand in a photograph. Even algorithms can reflect and amplify human biases when making
recommendations and returning search results.

Companies should accept the possibility for discrimination on their platform and be transparent when
it occurs; providing data on discrimination can mark progress toward eliminating it. Withholding
sensitive information, or making it less prominent, can prevent some forms of discrimination and
automating transactions can remove decision points where bias can occur.

Security concerns and complaints management: Consumer safety is one of the major concerns that
companies face with sharing economy business models. Traditional firms are subjected to regulations
that are often not applicable to emerging sharing economy business models. This leads to a larger
question of who takes the responsibility if anything goes wrong. For example, Uber continues to be
involved in disputes with several governmental bodies, including local governments in USA and
Australia and it was banned from Spain and New Delhi in the past because of reasons related with
employment law, consumer protection, unfair commercial practices, tax law or insurance issues.
Some intermediary companies offer feedback and ratings systems that allow consumers to share their
experience and give ratings to the service provider. But the question still remains, whether these
ratings alone are enough to build trust.

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Another problem lies in the complains management, as most of them are addressed through mobile
apps. Most businesses do not have a physical location for handling consumer grievances in each of
their market locations, so grievances are all managed through a central location/office.

Monopoly and fair competence: The sharing economy has turned traditionally underused assets into
competitors to established industries. This is seen as a threat to incumbent industries, especially in
sectors like the hotel and taxi industries, which had to improve their own service in response to the
new competition. Sharing economy services are driven by network externality, the positive effect that
an additional user of a good or service has on the value of that product to others, as the value of a
product or service increases according to the number of others using it. Also, they are characterized by
high switching costs between different networks (lock-in effects). Therefore, regulations should
address these factors to ensure a fair competence and avoid monopolist markets, levelling the playing
field between old businesses and new sharing economy platforms that are accused of playing with
regulatory advantages that gives them an "unfair" advantage that enables them to charge lower prices.

Experiences

The main examples of sharing economy companies are Airbnb, BlaBlaCar and Uber, as they have
been the companies with the biggest impact and growth since the appearance of this economy model.
All of them are characterized by:
● Are technology-driven solutions.
● Have lowered transactions costs.
● Depend on idle assets that lead to a win (owner) - win (renter).
● Work with social media and online reviews that build “Trust”.
● Have network effects that led to greater outcomes for all parties involved.
● Appeared thanks to a flexible regulation.

Airbnb is an American company which operates an online marketplace and hospitality service for
people to lease or rent short-term lodging including holiday cottages, apartments, homestays, hostel
beds, or hotel rooms, to participate in or facilitate experiences related to tourism such as walking
tours, and to make reservations at restaurants. The company does not own any real estate or conduct
tours; it is a broker which receives percentage service fees in conjunction with every booking. The
company has over 4 million lodging listings in 65,000 cities and 191 countries and has facilitated over
260 million check-ins.

BlaBlaCar is an online marketplace for carpooling. Its website and mobile apps connect drivers and
passengers willing to travel together between cities and share the cost of the journey. The service is
available in 21 countries, almost all which are in Europe – countries include Spain, Portugal, France,

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Italy, Belgium, Luxembourg, The Netherlands, Poland, UK, Russia, Ukraine, Germany, India,
Turkey, Hungary, Croatia, Serbia, Romania, Slovakia, Mexico, and Brazil.

Uber Technologies Inc. is an international company that provides a network of private transport to its
clients through its own software (mobile application), that connects passengers with drivers of
vehicles registered on its service who offer transportation service to particulars. The business has its
headquarters in San Francisco (California), but it is present worldwide.

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References

Sharing economy. Investopedia. https://www.investopedia.com/terms/s/sharing-economy.asp

Collaborative economy. Investopedia. https://www.investopedia.com/terms/c/collaborative-

economy.asp

Infographic: The sharing economy. The Entrepreneur. https://www.entrepreneur.com/article/295148

Number of sharing economy users in the U.S. 2016-2021. Statista.

https://www.statista.com/statistics/289856/number-sharing-economy-users-us/

Pros and cons of sharing economy by Crystal Lombardo. Vision Launch

http://visionlaunch.com/pros-and-cons-of-sharing-economy/#

The Current and Future State of the Sharing Economy by Niam Yaraghi and Shamika Ravi.
Brookings India IMPACT Series https://www.brookings.edu/wp-
content/uploads/2016/12/sharingeconomy_032017final.pdf

http://www.dummies.com/education/science/environmental-science/ten-real-life-examples-of-the-
tragedy-of-the-commons/

Review of the collaborative economy - Deloitte -

https://www.finance.nsw.gov.au/sites/default/files/Deloitte_Report_Review_Collaborative_Economy.
pdf

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