I have written
several follow-up blogs to a Perspectives
from FSF Scholars entitled “The Sharing
Economy: A Positive Shared Vision for the Future,” which was
published last year. These pieces have referred to the welfare gains consumers
have experienced in the new “sharing economy.” Many new companies employing
Internet-based applications, such as Airbnb and Uber, have emerged to provide
competition to traditional business models and subsequently pushed down prices
in their respective markets.
In the Perspectives from FSF Scholars entitled “The
Sharing Economy: A Positive Shared Vision for the Future,” Randolph May and I
stated the following:
These new online applications facilitate the exchange
of goods and services in a way which easily enables a range of peer-to-peer
connections and which reduces transaction costs. Individuals have always been
able to sell or borrow goods and services through yard sales and community
markets, but the Internet has changed the process with a faster, easy-to-use
information exchange. For over a decade now, companies like E-bay and
Craigslist have used the Internet to lower the transaction costs of modern
commerce. But more recently, an influx of new companies and Internet-based
applications has emerged enabling individuals to more easily “share” their
underutilized things, including, for example, their homes, apartments, and
cars.
In a
newly-published March 2015 scholarly paper entitled “Peer-to-Peer
Rental Markets in the Sharing Economy,” New York University professors Samuel Fraiberger and Arun Sundararajan empirically tested
how rental markets within the “sharing economy” are impacting consumers. Professors
Fraiberger and Sundararajan found, with statistical significance, that the
benefits of “sharing economy” markets have a greater impact on low-income
persons than high-income persons.
The new
study states:
We highlight this finding because it speaks to what
may eventually be the true promise of the sharing economy, as a force that
democratizes access to a higher standard of living. Ownership is a more
significant barrier to consumption when your income or wealth is lower, and
peer-to-peer rental marketplaces can facilitate inclusive and higher quality
consumption, empowering ownership enabled by revenues generated from
marketplace supply, and facilitating a more even distribution of consumer
value.
The explanation of
the results is quite simple. Due to the accountability and transparency that many
sharing applications provide about their users, the emergence of trust between
individuals to share their goods and services has shifted consumer preferences
from owning to renting. People who could not afford to own a house, car, or
even a power saw can now more easily rent them from others and ultimately enjoy
a higher standard of living than they would have otherwise. Additionally, people
who would have owned a car or power saw in the past might now rent them
instead, saving a significant portion of their income.
Of course,
high-income people gain from the sharing economy as well. But the savings
accumulated from a shift in owning to renting is more valuable to people with
low incomes than to people with high incomes. In economic terms, this is the
law of diminishing marginal returns. All else equal, each dollar earned is
valued less than the previous one.
Similarly,
low-income people, who already own goods that can be rented out, stand to gain
more from these transactions than high-income people. The extra income from
sharing a car with someone is much more valuable to a poor college student than
it is to a wealthy professional. As I have written before, Airbnb, for example,
makes traveling less expensive, not only because it provides competition – and often
lower prices – to traditional hotels, but also because travelers can share their
living space while away. (See here.) In other words,
as a result of the sharing economy, the same traveler on the same trip may
realize economic benefits in his or her capacity as both a lessor and lessee.
The emergence of
the “sharing economy” has provided large welfare gains to the economy as a
whole. Consumers have additional, and often less expensive, options in everyday
markets, and entrepreneurial activity has been created by ordinary people
because Internet-enabled applications have vastly lowered the barriers to
market entry.
Professors
Fraiberger and Sundararajan’s paper is significant in its use of empirical data to conclude
that access to peer-to-peer rental markets has the effect of increasing savings
for renters and increasing incomes for suppliers. While this economic effect of
the “sharing economy” is beneficial to all market participants, it proves most
valuable to low-income persons. The paper makes for an interesting read as well
as a scholarly contribution to the limited academic literature regarding the
new “sharing economy.”
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