Sharing economy – competition and regulations

In 1995 Pierre Omidyar sold his broken laser pointer for $14.83. This buyer collected broken laser pointers on an online auction site Omidyar created on Labor Day weekend. This auction site later became known as eBay. Today, eBay is a multibillion-dollar business with operations in over 30 countries. As the story suggests, the Internet has become a powerful tool for buyers and sellers to find each other. The latest concept, called “sharing economy”, has been gaining popularity over the last few years. Where Airbnb, eBay, and Uber have been leading examples of to peer-to-peer markets. People rent out their properties, or spare bedroom. Use their vehicle as a taxi in their spare time or even full-time. However, this phenomenon expanded its wings into other markets as well.

While these businesses each specialize in a specific service, they share common and innovative elements. These include intuitive and easy to use websites and mobile apps, lower entry costs for service providers. Rating systems and reviews for the provider and consumer, and competitive pricing are also examples.

invisible hand

Economists around the world agree that to reach efficient markets, it’s necessary to allow the provision of “invisible hand” direction. Plus the demand, which will determine the fair price. The “invisible hand” was originally introduced by the pioneer of the modern economy, Adam Smith (1723-1790). This theory is very simple. A consumer is freely allowed to choose what to buy. Each producer is freely allowed to choose what to sell and how to produce it. So the market will settle the price and quantity of a specific product. Competition brings prices down. And makes the markets more efficient. There are markets and products that can’t implement this theory. Such as infrastructure or in regards to the military. However, markets such as transportation and tourism, it seems that adding competition to the scenario reduces prices.

Competition

Competitive pricing clearly benefits the consumers. But how are business owners affected by competition? In June 2014, taxi drivers staged a large-scale protest against Uber. It happened in London, Berlin, Paris and Madrid. They were demanding that banned Uber services. The Finnish taxi drivers have also been demanding to ban the Uber drivers. Whereas the government has in 2016 and early 2017, been working on the legislation. Ended up opening the competition for taxi services. The number of taxi licenses has been regulated in Finland. This result in taxi fares being one of the highest in the world.

On the contrary, across the Gulf of Finland, in Tallinn, Estonia, the government made this competition legal. They were one of the first countries to legalize taxi applications. And from here the competition has prosper. The prices for a taxi ride has been pressed down in Tallinn. And even during busiest hours, there are enough taxis available. Alternately, there are not enough taxis on the streets of Helsinki, during the busiest hours. Due to the over-regulation.

Helsinki taxi companies demanded the government to ban Uber because they feared competition and reduction in fares. Even without specific legislation to restrict people from driving for Uber, the court ruled in favor of taxi drivers. The government fined uber drivers for providing “illegal taxi services”. The result has made potential drivers fearful to enter the market. And the riders in Helsinki continue to pay high prices for their taxi.

Sharing economy- who benefits?

Those who most benefit from the competition are consumers. As the comparison of taxi fares between tallinn and Helsinki showed. But in the sharing economy, those who share their homes or provide ride-sharing services also benefit. The extra income can balance the costs associated with owning a home or driving a car. And can represent a profit for those unemployed or underemployed. It might not be the chosen career path but used as a backup plan to pay bills.

Businesses that started with the “sharing economy” concept are no longer newcomers. The size and scale of that firms have grown a lot. And even surpass some of the world’s largest businesses. The economic impact of these technology-driven firms grows. Many municipalities and regions have accepted change as inevitable. And they really want to facilitate new efficiencies for consumers. Uber, in particular, has made a lot of regulatory headway since 2015.

Airbnb- a crowdfunded project

Despite the lack of regulation, markets sometimes thrive. Like Estonia’s taxi markets.

Berlin has experienced housing shortages for years. Due to a lack of apartments for residents, the city used this reason to ban Airbnb. Banning the shared economy was the only solution they saw in this situation. They started redirecting travelers to hotels, motels, and hostels. Airbnb, in its defense, has drafted its own reports of how the home sharing service benefits local economies.

Regardless of some banned sharing economy platforms, the sharing economy markets are booming. Airbnb’s has grown exponentially since the beginning. From one person’s living-room Bed and Breakfast lodging to a crowdfunded project. And continuing to a million-dollar business. While taxi drivers in Paris and London have been protesting, some European countries have embraced the sharing economy. The Estonian Prime Minister, Taavi Rõivas, pointed out a very important issue with business within sharing economy. He thinks that these business models do not just mean better competition and better service levels. But they may also become a part of the solution to Estonia’s sparse population issue. As well as incentive more people to become entrepreneurs.

Sharing Economy - share your apartment

Furthermore, the sharing economy in Estonia has been growing within the past years. It reached 40.3 million euros in 2016 and the turnover has grown by 7.5% from last year. The number of platforms has doubled. According to Technopolis Group and Ernst & Young’s survey, the sharing economy would quadruple by 2020. The biggest growth in Estonia, however, has been the accommodation and financial service sectors. The number of people working in the field has grown, which has opened more opportunities to Estonians.

Why now?

So, why are the peer-to-peer markets flourishing now and not decades ago? The technological advances play a big part. Such as the increased use of smartphones and their falling costs. The rising capabilities of the Internet. This is only part of the story. The second part of success seems to be behind industry. As well as academic experience in the design and management of online marketplaces.

The popularity of sharing economy has gained a lot of attention. Not just in the small communities but also worldwide. Additionally, the concern of safety has been discussed. The governments must regulate the sharing economy regarding security issues. However, background checks verify safety and riders, drivers and hosts are rating each other. Airbnb post the reviews on their website, which can link to a person’s Facebook page. The risk of getting a bad review and it being posted on Facebook tends to keep consumer and provider well behaved. And eager to please. While some regulation may be necessary, it shouldn’t be a form of protectionism. Mostly for companies that thrive in over-regulated markets. On the contrary, governments should seek to deregulate markets in ways that benefit the public.

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References:

Horton & Zeckhauser      The European Parliament       Journalist’s Resource       Forbes