Economic Theory

A note on sharing economy platforms, in light of the Uber ruling

The sharing economy is about reducing transaction costs. As Duke University Professor Michael Munger wrote for the IEA last year, such reductions take mainly three forms:

  • providing information about prices and options in a way that is searchable, sortable and immediate;

  • outsourcing trust to assure safety and quality in a way that requires little investigation or effort by the users;

  • consummating the transaction in a way that is reliable, immediate and does not require negotiation or enforcement on the part of the users.

(Note that ‘users’ here refers not just to buyers of sharing economy goods and services, but also providers. Anybody who is part of an exchange on a sharing economy platform is a user.)

The services provided within the sharing economy are myriad and varied, so it should come as no surprise that the three types of transaction-cost reductions outlined above have different relative weights depending on the particular service in question.

For users of Airbnb, arguably the most important transaction cost comes from hosts not knowing their guests beforehand. A house or flat is a valuable and prized possession, so letting strangers stay in it requires strong assurances of reasonable behaviour and adequate compensation in case of breach. That is why Airbnb focuses on providing users on both sides with accurate – peer-provided – ratings, and with $1,000,000 insurance coverage.

For Uber, on the other hand, price transparency and immediacy are essential. Prospective drivers and passengers want to know who is available here and now, and at what price. It is therefore efficient for Uber to set prices centrally – though subject to surge pricing to balance excess demand – because users care about some degree of prior knowledge of the cost they will face. Uber rides are a relatively homogeneous product: whilst passengers have access to different types of vehicles at different price points, ultimately what matters to them most is getting from A to B at reasonable cost and in a timely fashion.

Airbnb flats, on the other hand, are heterogeneous. It wouldn’t make sense for them to pre-set a price because there are many variables – location, size, amenities, and so on – which come into determining the market value of a dwelling, and these are specific to each individual flat or house.

In other words, the nature of the markets which they enable is what determines the way that sharing economy platforms structure those markets. But this shouldn’t lead us to think that platforms are anything but intermediaries. They are a marketplace in which users interact, to their own benefit and, ultimately, at their own risk. It is not the Airbnb’s responsibility to ensure there is a flat that will suit my preferences, or Uber’s to find a passenger who will take a ride from me. I make myself available as a buyer or seller, and it is up to my efforts to find a counterparty.

Additionally, there is platform competition which propels the most effective intermediaries and weeds out the less competitive ones. For instance, in the U.S. and parts of the Continent it is not uncommon for Uber drivers to multi-home, i.e. to work for a different provider – e.g. a local private hire firm, or another platform such as Lyft – depending on which is busier. This is a form of price arbitrage which helps to transfer resources to where they are most valued (and thus needed). It also means that drivers cannot really be seen as ever exclusively employed by any one platform, since they can log in and out of the apps at their leisure.

What are the consequences of forcing minimum wage, working time and holiday pay regulations on platforms? As a result of the bureaucratic nightmare involved in ascertaining the appropriate amounts of each for each user, the chief consequence will be a reduction in the efficient scale of platforms, because some market participants just do not clock in enough time on apps to justify the fixed cost of applying these rules. Since sharing economy platforms have expanded the scope for feasible transactions by reducing the costs of interaction, limiting their scale will be a net cost to users and thus a net welfare loss. It will also likely chill innovation and the emergence of competition to existing platforms.

However, it doesn’t have to be this way. We can change labour market and welfare regulation to ensure that the goals of policy – adequate standards of living for everyone, the possibility of holiday and leisure time – can be achieved, whilst the allocative power of markets is harnessed to its fullest extent. That is a progressive aim to strive for.

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.

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