Sharing economy – competition and regulations

In 1995 Pierre Omidyar sold his broken laser pointer for $14.83 to a buyer who 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 in which people rent out their properties, or spare bedroom, use their vehicle as a taxi in their spare time or even full-time. However, this “uberization” has been expanding 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.

Economists around the world argue the most efficient markets are achieved by allowing the “invisible hand” steer supply and demand which will determine the fair price. The “invisible hand” was originally introduced by the pioneer of the modern economy, Adam Smith (1723-1790). The theory has been interpreted so if a consumer is freely allowed to choose what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle the price and quantity of a specific product. This theory suggests the fact that most people can see around them – competition brings prices down and makes the markets more efficient. The theory, however, cannot obviously be implemented in all markets and products, such as infrastructure or in regards to the military. However, markets such as transportation and tourism, it seems that adding competition to the picture does lower prices.

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 in London, Berlin, Paris and Madrid demanding Uber services be banned. 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 opening the competition for taxi services. The number of taxi licenses has been regulated in Finland resulting in taxi fares being some of the highest in the world. On the contrary, across the Gulf of Finland, in Tallinn, Estonia, the government made “uberization” legal – one of the first countries to legalize taxi applications and the competition has flourished. The prices for a taxi ride has been pressed down in Tallinn and even during peak hours, there are enough taxis available. Alternately, in Helsinki during peak hours there are simply not enough taxis on the streets due to the resulting short supply created by over-regulation.

Fearing competition and a reduction in fare rates, Helsinki taxi companies also demanded the government ban Uber. Even without specific legislation to restrict individuals from driving for Uber, the court ruled in favor of the taxi drivers and individual Uber drivers were being fined for providing “illegal taxi services”. The result has made potential Uber drivers fearful to enter the market and the riders in Helsinki continue to pay high prices for their taxi transportation.

If the economists are to be believed in, the benefactors of more competition are the consumers, as shown in the taxi fares comparing in Tallinn versus Helsinki. But in the sharing economy, those who share their homes or provide ride-sharing services also benefit. The extra income can offset the costs associated with owning a home or driving a car and can be especially beneficial to those who are unemployed or underemployed. It might not be the chosen career path but used as a temporary means to pay bills.

The businesses that have advanced the concept of the “sharing economy” are, in many respects, no longer rebels or newcomers. The size and scale of Uber, Airbnb and several other firms now rival, and even surpass some of the world’s largest businesses in transportation, hospitality, and other sectors. As the economic impact of these technology-driven firms grows, regulatory and policy skirmishes are taking place in cities and towns around the world. While many municipalities and regions have accepted change as inevitable and have been eager to facilitate new efficiencies for consumers – Uber, in particular, has made a lot of regulatory headway since 2015.

In spite of a lack of regulation sometimes makes the markets thrive, such as the Estonian taxi markets, banning the sharing economy has been the only solution in some situations. Berlin has experienced housing shortages for years, and due to a shortage of apartments for residents the city used this reason to ban Airbnb and 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 growth has been exponential since the beginning, in 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: “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, and incentivize more people to become entrepreneurs”.

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

So, why are the peer-to-peer markets flourishing now and not decades ago? Surely the sharing economy is nothing new. The technological advances play a big part, such as the increased use of smartphones, their falling costs and rising capabilities of the Internet. This is only part of the story. The second part of success seems to be behind hard-won industry and academic experience in the design and management of online marketplaces.

The popularity of sharing economy has gained a lot of attention both in the small communities and worldwide media. Additionally, the concern of safety has been discussed and should the governments regulate the sharing economy in regards to safety concerns. However, the safety is monitored through background checks and hosts or riders and drivers are rating each other. Airbnb post the reviews on their website, which can also be linked to a person’s Facebook page. The risk of getting a bad review and it being posted on Facebook tends to keep both the consumer and the provider well behaved and eager to please. While some regulation may be necessary, it should not be in the form of protectionism for businesses thriving in the overly regulated market. On the contrary, governments should seek to deregulate markets in ways that benefit the public.

References:

Horton & Zeckhauser      The European Parliament       Journalist’s Resource       Forbes