The Sharing Economy: Efficiency Through Disruption

Disruptive by nature, the sharing economy could bring about a more efficient economy through its ability to naturally self-regulate, as long as we can endure some growing pains along the way.

Out with the Old, In with the New

Fifteen years ago, many people used CD players. Then Apple came out with the iPod and iTunes and CD players slowly drifted into obsolescence. Then Netflix drove Blockbuster out of business, and now Amazon is threatening to do the same to Wal-Mart. Such is the beauty of the free market system. If something new works and consumers like it, it catches on.

[postquote]

Powered by a similar wave of consumer-centric popularity, peer-to-peer companies are disrupting the economy on a larger scale due to their ability to naturally self-regulate. Simple services, like taxi rides and lodging, show the sharing economy’s superior ability to efficiently distribute resources as compared to more traditional, regulated industries.

Throughout different times of the year, hotels could be packed or they could be nearly vacant, which is where the sharing economy comes in. Consumers might opt to rent a room through Airbnb rather than pay hotel or resort rates during peak season. On the supply side, the act of renting out one’s extra room is efficient in the sense that if it isn’t being rented out, its utility is wasted.

The demand side of things is relatively straightforward. A typical hotel now competes with an Airbnb location to provide lodging for a consumer. That’s not that tricky.

Where things differ though is on the supply side of the equation, with the value of goods being distributed in different ways. Hotels and resorts employ many people, which is obviously a good thing. On the other hand, sharing economy platforms allow every-day people to derive more value from things they already have, but just haven’t been able to distribute – i.e., that guest bedroom that used to sit vacant.

So yeah, it’s great for consumers to have cheaper options, but if hotels are run out of business, people will lose their gigs. The answer here isn’t to block innovation, it’s for hotels to realize they need to start providing more efficient value to consumers. This is how capitalism is supposed to work, and blocking innovation won’t solve it.

The Beauty of Natural Regulation

Many sharing economy companies rely on a simple, yet unique system of checks and balances to drive efficiency. Uber, Airbnb and many other sharing economy platforms use rating systems on both ends; host and guest, driver and passenger, etc. For example, if an Uber driver gets too many bad ratings, they aren’t allowed to continue driving. If an Airbnb guest frequently gets awful ratings, nobody will want to host them. Again, it goes back to naturally promoting efficiency.

If the economy starts to move more towards the sharing economy in bulk, we could see these rating systems and vessels of social exclusion become much more widespread, much like credit scores nowadays. If a consumer gets too many bad ratings on too many platforms, it could be aggregated on some sort of rating system that other sharing industries could see in order to rationally decide if they should conduct business with them.

This may sound like a blessing to some but a nightmare to others. If your friends constantly get sick in Uber cars or leave their Airbnb guest room a mess, they could potentially get a bad aggregate score and not be able to conduct a lot of business with similar platforms as a result. But you, the one who is the poster-child for Uber passengers and leaves the Airbnb room cleaner than you found it, could look forward to a great score and potentially some incentives from other platforms as a reward.

Our Take

People and industries need to understand that change is a good thing. Good, however, doesn’t always translate to comfortable, especially in the short-term. People could lose jobs, industries could fade out, etc. But the short-term fearmongering doesn’t do justice to the underlying point of innovation: improving technology, goods and services for the future.

The sharing economy, while young and “scary” to many, has the potential to drive efficiency and trade through naturally regulated infrastructures instead of creating more inequality through inefficiency.