The Sharing Economy: Issues Facing Platforms, Participants, and Regulators

I. INTRODUCTION

The Mercatus Center at George Mason University is dedicated to advancing knowledge about the impact of regulation on society. As part of its mission, the Mercatus Center conducts careful and independent analyses employing contemporary economic scholarship to assess rulemaking proposals from the perspective of the public interest. Thus, this comment before the Federal Trade Commission (FTC) does not represent the views of any particular affected party or special interest group. Rather, it is designed to assist the commission as it weighs the costs and benefits of regulation that affects the sharing economy. Our comments to the commission are derived from recent Mercatus Center working papers on these issues.² 

II. THE IMPACT OF THE SHARING ECONOMY 

In its workshop announcement, the commission asks, “How have sharing economy platforms affected competition, innovation, consumer choice, and platform participants in the sectors in which they operate? How might they in the future?” 

To understand the impact that the sharing economy has had on competition, innovation, and consumer choice, it is important to define the sharing economy. In its broadest sense, we argue that the sharing economy is any marketplace that uses the Internet to bring together distributed networks of individuals to share or exchange otherwise underutilized assets.³ Thus, it encompasses all manner of goods and services shared or exchanged for both monetary and nonmonetary benefit. The sectors in which the sharing economy has seen substantial growth—and has created the most disruption—include transportation, hospitality, dining, goods, finance, and personal services. 

We have identified five ways the sharing economy is creating value for both consumers and producers: 

1. By giving people an opportunity to use other people’s cars, kitchens, apartments, and other property, it allows underutilized assets or “dead capital” to be put to more productive use.⁴
2. By bringing together multiple buyers and sellers, it makes both the supply and demand sides of its markets more competitive and allows greater specialization.
3. By lowering the cost of finding willing traders, haggling over terms, and monitoring performance, it cuts transaction costs and expands the scope of trade.⁵
4. By aggregating the reviews of past consumers and producers and putting them at the fingertips of new market participants, it can significantly diminish the problem of asymmetric information between producers and consumers.⁶ 
5. By offering an end run around regulators who are captured by existing producers, it allows suppliers to create value for customers long underserved by those incumbents that have become inefficient and unresponsive because of their regulatory protections. 

These factors can improve consumer welfare by offering new innovations, more choices, more service differentiation, better prices, and higher-quality services. In short, as the commission’s workshop notice puts it, “The development of the sharing economy can stimulate economic growth by encouraging entrepreneurship and promoting more productive and efficient use of assets.” Irrespective of how the sharing economy creates value, the revealed preferences of both consumers and producers suggest that it does create a substantial amount of economic value. As the commission notes, “Sharing economy transactions have increased rapidly in recent years, reaching an estimated value of $26 billion globally in 2013, and some estimates predict that the sharing economy will generate as much as $110 billion annually in the near future.” 

Much of this value flows to individuals who would otherwise be unable to compete in these markets. For those entering the sharing economy as producers, these new platforms create opportunities to generate income from sources that were historically available only to a select few. In the recent past, only those with access to the capital necessary to build hotels could offer rooms as short-term rentals. But firms such as Airbnb and HomeAway allow individuals to penetrate markets traditionally dominated by large incumbents such as Hilton Worldwide and Marriott International. In 2014, for example, guest stays through Airbnb totaled nearly 22 percent more than Hilton Worldwide.⁷ And recent projections estimate that the sharing economy has the potential to increase over twentyfold in terms of revenue by 2025.⁸ 

As we have noted in our previous research, the increased competition from the continued growth of the sharing economy will have direct, positive effects on consumer welfare.⁹ First, and most obviously, these firms give consumers access to a broader range of goods and services. The ease of entry and innovation in the online world mean that new entrants in the sharing economy can provide better options and address consumer needs in ways that more traditional business models cannot. According to surveys, consumers currently take advantage of sharing economy services primarily because they offer better prices, a sense of community, greater convenience, and higher quality.¹⁰ In terms of greater convenience and quality, comparisons of Yelp ratings in almost any major city where ride-sharing firms operate demonstrate overwhelming consumer satisfaction.¹¹ Moreover, a recent survey of US adults familiar with the sharing economy found that 86 percent agree it makes life more affordable, and 83 percent agree that it makes it more convenient and efficient.¹² 

The sharing economy, through its use of the Internet and information technology, also offers consumers more information about products and services, and it empowers consumers to act on that information. Many economists have worried about the existence of information asymmetries between producers and consumers, and they have argued that this asymmetry justifies many consumer protection regulations. However, the Internet largely solves this problem by providing consumers with robust search and monitoring tools so that they may find more and better choices.¹³ These tools lower the transaction costs of searching for willing trade partners, haggling with them over terms, and monitoring them for compliance. We will discuss these tools, especially reputational mechanisms, in more detail in section VI.

Continue reading