How is the Sharing Economy affecting the way we are doing business?

29/11/2017

“The world’s largest taxi firm, Uber, owns no cars. The world’s most popular media company, Facebook, creates no content. The world’s most valuable retailer, Alibaba, carries no stock. And the world’s largest accommodation provider, Airbnb, owns no property. Something big is going on.” – The Independent, May 2015

It is sufficient to reflect on this consideration to understand how the way we are doing business is changing. Through the so-called “Third Industrialization” that expanded the outreach of sophisticated and innovative high-tech goods and services globally, a small business owning nothing more than laptops and whiteboards can now be worth billions of dollars. How is this possible? Simple. In 1995, only 1% of the world population had an Internet connection. Today, more than 40% of the world population can access the Internet on a daily basis (ITU, 2015).

This unprecedented development and geographic expansion of the Internet provided the fundamentals for the emergence of a new type of ecosystem – the sharing economy (SE) - that finds in the easy, quick and simultaneous provision of goods and services its basic fuel. The mechanisms behind this disruptive change are pretty straightforward. By reducing the coordination and transaction costs traditionally associated with matching supply and demand, the progressive advances in the ITC sector led to an easier and cheaper way of sharing assets that - in conclusion - facilitated collaborative consumption and production on a much larger scale than what was even conceivable at the sunset of last millennium (The Economist, 2013). Today, the ‘collaborative consumption’ allows people to earn over $15 billion a year by renting, selling and sharing what they already own: from cars and home to money and time (Stephany, 2015).

But what it is really disruptive about the emergence of the SE? Certainly not the possibility to rent assets: the idea of sharing, swapping, and leasing of good and services, as well as intangible resources, is nothing new. On the contrary, what it is really changing is the ability of performing such actions in a much simpler and frictionless fashion. But how sharing applications such as Airbnb, Lyft and EatWith have cut into the profits of traditional service industries and reshaped conventional business models? Let’s get a closer look into such mechanisms.

1. The SE unlocks new renting opportunities and reduces prices through increased utilization
Sharing allows the asset to be used at a higher frequency compared to a case in which the owner exclusively retains the possibility of using it. To the extent that shared assets are used more, the fixed costs can be spread over more users, thus making the marginal cost lower and lower. As the cost goes down, the price for a given volume intuitively falls. It is not difficult to find examples of this process. As Rifkin clearly explains in his book (2014), for a traditional hotel chain adding another room to its inventory is expensive, as the room must be built or acquired. This process usually entails huge overhead and operating fixed costs — mortgage payments, property taxes and so on.

On the other hand, Airbnb can add another room to its inventory at almost no cost, since its website is already up and running. Basically, all accommodation renting platforms can rent their dwellings far more cheaply than conventional hotel chains can price their rooms. The result is that ordinary consumers can have access to the same service – in this case, accommodation – at a considerably cheaper price.

2. The SE lowers down barriers to entry thus reduces prices through increased supply
The SE makes it easier to get your business started as well as closing up when it is no longer profitable. In this case, the SE makes it easier to offset renting-associated inconveniences, such as the transaction costs of offering assets for sale, and risks, as the potential asset being damaged. Think about some of the major obstacles producers traditionally face in entering a market, like – for instance – the cost associated with attracting new or existing business potential. By reducing the information asymmetries and transaction costs – described as the time, money, and effort needed to facilitate a market exchange – providers can reach out to costumers and manage their expectations at a much lower price than before.  Or, again, think about the expensive occupational licenses drivers have to purchase in order to drive a taxi. In this new ‘shared’ market, Uber drivers can instead contract their services for little more than a background check.

These lower barriers to entry that distinguish the SE have also the immediate effect of increasing competition in the overall market space, thus driving the price down. For instance, more drivers operating in the market – whether they are driving a conventional taxi or their own car – means more competition, and more competition means a consequent drop in prices. A recent study has calculated the difference in fares for a sample trip of 5 miles in 10 minutes in every major city in the U.S where Uber operates. The study shows that Uber is cheaper than its traditional taxi counterparts in most major American cities, even excluding the taxi driver’s tip. (Silverstein, 2014).

3. The SE increases competition and leads to improvements in the quality and performance of existing providers
To the extent that existing providers face greater competition, the competitive ‘pressure’ effect is likely to take place. Providers that operate in the traditional market space will be more and more incentivized or even forced to innovate by adopting new technologies to improve their services and therefore survive in this new fiery competitive marketplace. There is some evidence that this effect is already being felt. The reported number of complaints per taxi ride in New York decreased after Uber’s entry into the market suggesting that taxis responded to Uber’s entry by improving their services – for example by modernizing their fleet, launching online apps to reduce search costs for passengers, running the air conditioner in the summer, or even not talking on cell phones while driving.

 

Finally, there is enough evidence that suggests that the SE is here to stay and grow in the future. Learning how to its evolution will impact current businesses, consumer behaviours and revenues streams is an important concern that every entrepreneur working in a digital era should be aware of.

by Alice Repetti

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