Three things everyone knows about the Sharing Economy that are probably wrong

At Europe Economics, we recently completed a major report on the Sharing Economy. Looking at the growing research literature, it was difficult to escape the conclusion at times that there was an awful lot of low-hanging fruit: unchallenged assumptions held by many commentators about its likely effects that are hard to sustain when you think through the economics.

These are three common conclusions in the literature discussing new platforms like Uber and Airbnb. None of them stand up to much scrutiny.

  1. It will increase inequality. The standard story is those who have assets will make more money by renting them out, the rest of us will never buy any assets, ergo inequality in income and wealth will increase. Meanwhile the owners of the platforms will become squillionaires. That intuition is wrong for a few reasons.

First, if people no longer need to put their money into depreciating assets like cars, they can invest in financial assets that generate more wealth over time. That effect will be larger for people on ordinary incomes, as assets they own to satisfy their own needs, despite poor financial returns, are a larger share of their assets.

Second, if we get more use out of a broad range of assets, that will mean less demand for capital overall. A reduction in demand for capital will reduce its price and help those starting with few assets, relative to those starting with lots of assets. That overall impact is easily missed if you focus just on the outcomes for those owning and letting specific assets.

Third, people on low incomes are the ones most likely to not have access to valuable assets now. Getting access to an asset like a car, or a service like transportation, is really valuable and creates new opportunities to increase your earnings. It mitigates existing social exclusion. There is evidence that Uber is serving low-income neighbourhoods in LA neglected by incumbents, for example.

Fourth, and finally, successful founders will get rich, sure, but there are very few of them and their returns are almost immaterial relative to the overall impact. As with most innovations, only a “miniscule fraction” of the benefits will be captured by producers, most will go to consumers (including those ‘consuming’ the marketing services offered by the platforms).

The Sharing Economy will almost certainly reduce inequality.

  1. The biggest challenge for policymakers is to maximise safety. It is a serious challenge for the platforms to keep consumers safe, but they have every incentive to overcome that challenge if they possibly can. There is a well-known cognitive bias, the availability heuristic, which means people tend to overstate the frequency of newsworthy events. We judge the frequency of an event by how often we hear about it. That means bad stories can be an existential threat to a platform’s reputation and therefore its business.

As part of their efforts to keep consumers safe, platforms could look into the customer ratings (including on other sites), the credit ratings and the backgrounds of existing and potential market participants. There is no technical obstacle to doing all that and more on top of the criminal records checks that are already standard.

In all but the tightest labour markets, it would probably make sense from their perspective to err on the side of caution. When in doubt, kick someone off the platform. After all, trust is everything. But if these markets become really important, do we want people getting kicked out too lightly? Providers might lose their ability to make a living, consumers might lose their ability to get around or take a trip at a reasonable cost.

If policymakers go into the business of regulating the Sharing Economy assuming that it is their job to maximise consumer protection, to make any slip up even more lethal to a platform which lets a wrong ‘un get through, they might do real harm. They might exacerbate social exclusion. There is a balance to be struck and politicians leaping into action in a “what about the children” panic, could easily make things worse, not better.

  1. Platforms are bound to become monopolies if we leave the market alone. This is supposed to result from network effects: the more people you have on your platform, the more attractive it is to offer your services through that platform.

It is possible that platforms could become monopolies, but without external intervention it would be wrong to assume that is necessary or even likely. Sharing Economy platforms have emerged and operate in a technically dynamic sector in which contestability is high. Relative to utility networks where natural monopolies are common, the need for capital investment is low and within the reach of a wide range of potential entrants.  Although the first entrant in a Sharing Economy market may face costs in establishing trust, consumer understanding of the product, and a stable market structure, it is likely that for later entrants that key spade-work would already have been done, considerably lowering the costs of follow-on entry.

Potential competitors could include firms in related industries with substantial brand loyalty and technical resources of their own. BMW has created a car-sharing platform. Apple Music was established as a competitor to Spotify. These are not minnows and they can use their strengths in other markets to challenge established platforms.

The most likely way to end up with a competition problem in this sector would be to curb the Sharing Economy with a raft of rules designed to protect incumbent providers. If the opportunity in the Sharing Economy is curtailed then only those already invested in its success will be able to justify forging ahead. Too much interference is more likely to be the problem, not too little.

Matthew Sinclair is a senior consultant at Europe Economics.

Matthew Sinclair is a senior consultant at Europe Economics.