Sharing-economy-image
Source: studentsforliberty.org

By Vasil Stoynov, Free University Berlin

I don’t need a drill. I need a hole in my wall.[1]

This is the slogan of the various new startups and enterprises that nowadays represent the concept of the “sharing economy.” One of the most successful and prominent examples of these new wave business models is the car-sharing service Uber, which has an expected value of $62.5 billion.[2] Uber was enjoyed by thousands of travelers and locals in Europe’s big cities up until last year, when the regulatory claws snapped and the company was banned in Belgium, the Netherlands, France, Germany, and Spain despite the protesting voices of consumers but to the relief of the taxi operators. The example of Uber illustrates the heated discussion between consumers, competitors and authorities about the future of the sharing economy. In the beginning of June, the European Commission tried to clear the clouds on the horizon by presenting a guidance paper with a clear message of support for the new business models,[3] but the practical challenges before the regulators remain. My position in this debate takes on the competition policy perspective and claims that banning companies like Uber or AirBnB is the worst strategic decision. The authorities should instead wisely open the windows to let some fresh air in the market.

What is the sharing economy?

Although people have been sharing resources for a very long time, digital technologies have changed the sharing landscape. Shrewd Internet platforms quickly and efficiently connect and coordinate individuals who are sharing and trading underused assets or resources.[4] Some examples in the EU are Shareyourmeal[5] (shared home cooking with neighbors) in the Netherlands, Fuxura[6] (lending platform) in Finnland and BlaBlaCar[7] (shared long distance ride) in Germany and France. Matching the supply with the demand in the digital world happens at a cost close to zero, which allows consumers to be actively involved in the exchange. The main features of the sharing economy—more effective utilization and greater economic efficiency—are without a dispute accepted as positive signs in any market. In addition to that, the new models respond to the challenge of more sustainable use of resources and attract users with their “peer-to-peer” experience.

The Schumpeterian perspective

The sharing economy reaches beyond higher social welfare. If we use the words of the evolutionary economist Joseph Schumpeter, the upsurge of companies like Uber can be explained as “creative destruction.” The creativity lies in the way the new models break the boundaries of the old industries and aggressively rush into the market, armed with better technology, innovative solutions, strong marketing, and high quality. On top of all this, they offer lower costs. This benefits are nevertheless at the expense of the incumbent companies that are squeezed or forced out of the market with all the social and political consequences. The creative destruction illustrates the messy way of delivering progress in the market economy. It is welcomed by economists as an important feature of capitalism that allows for societies to grow richer and more productive and for consumers to benefit from new and better products and services.

Support for the sharing economy is reinforced by economic analyses of real life experiences. Studies show that, in the city of Stockholm for example, peer-to-peer transport services have decreased traffic at an estimated €94 million total social value, created around 3,000 jobs in the short term, and reduced CO2 emissions at an economic value of €21 million.[8] Despite these impressive results, the idea that traditional industries are forced to improve under the competitive pressure of the sharing economy is confirmed, for instance by the data analysis of taxi company complaints in New York and Chicago after the entrance of Uber.[9] As for the cost for the incumbents, there is evidence as well. For example, the local hotel room business in the city of Austin, Texas, where Airbnb has its highest supply, has shown revenue losses. [10]

A look behind the curtain

Although the economics speak in favor of the new models and consumers love quality services at bargain prices, there are good reasons to stop for a second and listen to the legitimate concerns raised by the public authorities. Among the most serious issues with the sharing economy are the liability of the peers, consumer protections, and social security and the taxation considerations—all of which are dealt with in the guidance paper by the Commission. If we focus on the level of competition policy, the tricky task is to decide where to draw the thin red line between the sharing economy against remuneration and the conventional commercial activity. Are Uber services identical to those of the taxi companies? When does an owner “share” his suite and when does he start doing business with it? This is the regulator’s golden hour! The ball is in the court of the authorities who have to level the playing field of the sharing economy and introduce appropriate rules that give the new companies enough room for development while putting their activity on solid ground. A few good practices some EU Member states use to tackle this problem are sector-specific thresholds of turnover or the number of days per year in which the service is provided.

This particular problem seems to be the biggest challenge for the sharing economy from a competition policy perspective and is currently the foundation for the ban on Uber in most of the EU countries. The courts ruled that the company’s commercial practice involves “unfair competition” – a concept that is developed only on national level and which refers among other things to situations where a service is offered without complying with regulatory requirements, thus taking advantage of competitors in the same market. In other words, the courts consider Uber to be in the same market as the taxi operators and see the lack of compliance with the rules as “unfair”. The Commission offers a flexible solution to this problem by suggesting that, if a peer-to-peer platform merely links the users via digital tools, it shouldn’t be subject to regulatory requirements. If the company is however providing additional services, it must bear the same regulatory burden.

A level playing field is not the only competition problem in the sharing economy. A more specific concern is raised with the so-called “pricing algorithms” used by Uber and some other platforms. They represent a pricing structure for the service that is unilaterally developed by the company and applied to all the drivers. When you call for a ride, it’s Uber that sets the price depending on various factors. However, if the drivers are independent peers, as the company claims, why aren’t they allowed to determine their fare in an independent fashion? In the current situation, the pricing algorithm seems to serve as a digital tool for price fixing,[11] which in the competition field is a hardcore infringement that can barely be justified on any grounds. However, so far no institution has opened proceedings against the company on this ground.

What is the next step?

The sharing economy has emerged in our world and is likely here to stay. If we put ourselves in the regulator’s shoes, there are three roads in front of us. Firstly, we can ban the new models in the interest and for the sake of strong incumbent lobbies. This is the worst policy choice. This would nip in the bud a new wave in the market that has undeniable economic benefits and that is seen as a light at the end of a tunnel of broken capitalism, according to thinkers like Paul Mason.[12] Secondly, we could push the sharing economy into the cage of heavy regulations surrounding traditional industries. Wrong again. The creative spirit and the flexible, innovative nature of the sharing models will suffocate under the pressure of the stiff rules imposed in the last few decades. Finally, we could follow the advice of the European Commission and embrace the new opportunities that the sharing economy can bring. This is not only a chance to support innovation, competition and sustainable growth, but also to release the incumbent industries from unnecessary regulatory burdens and incentivize them to adapt to and follow the modern methods used by these digital platforms. Of course, this does not mean we should neglect all the public policy issues and concerns. As Commissioner Elżbieta Bieńkowska announced, we would enjoy the benefits of the sharing economy “provided we get it right.[13] This means that the authorities should step in and adequately protect the safety and security of consumers, but also leave the rest to the fair rules and the invisible hand of the market. That would be for the good of all of us.

Vasil Stoynov is a student in the master’s program “International and European Business, Competition and Regulatory Law” at Free University Berlin.


[1] ‘The Sharing Economy’. Consumer Intelligence Series, PricewaterhouseCoopers https://www.pwc.com/us/en/technology/publications/assets/pwc-consumer-intelligence-series-the-sharing-economy.pdf

[2]  Mike Isaac, Leslie Picker, ‘Uber Valuation Put at $62.5 Billion After a New Investment Round’, in: http://www.nytimes.com/2015/12/04/business/dealbook/uber-nears-investment-at-a-62-5-billion-valuation.html

[3] ‘A European agenda for the collaborative economy’, European Commission – Press release, 2 June 2016 http://europa.eu/rapid/press-release_IP-16-2001_ga.htm

[4] ‘A fair share? The economics of the sharing economy’, Oxera http://www.oxera.com/Latest-Thinking/Agenda/2015/A-fair-share-The-economics-of-the-sharing-economy.aspx#_ftn1

[5] https://www.shareyourmeal.net/

[6] https://www.fixura.fi/en-fi/home/

[7] https://www.blablacar.com/

[8]Amanda Stefansdotter, Carl von Utfall Danielsson, Claus Kastberg Nielsen, Eva Rytter Sunesen, “Economic benefits of peer to-peer transport services’ in Copenhagen  economics: https://www.copenhageneconomics.com/dyn/resources/Publication/publicationPDF/0/320/1441009386/economics-benefits-of-peer-to-peer-transport-services.pdf

[9] Scott Wallsten, The Competitive Effects of the Sharing Economy: How is Uber Changing Taxis?’ in Technology Policy Institute, June 2015 https://www.ftc.gov/system/files/documents/public_comments/2015/06/01912-96334.pdf

[10] Georgios Zervas, Davide Proserpio, John W. Byers, ‘The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry’ http://cs-people.bu.edu/dproserp/papers/airbnb.pdf

[11] Georgios Petropoulos, ‘Uber and the economic impact of sharing economy platforms’, in Brugel, 22 February 2016 http://bruegel.org/2016/02/uber-and-the-economic-impact-of-sharing-economy-platforms/

[12] Paul Mason, ‘Airbnb and Uber’s sharing economy is one route to dotcommunism’, in: The Guardian, 21 June 2015 http://www.theguardian.com/commentisfree/2015/jun/21/airbnb-uber-sharing-economy-dotcommunism-economy

[13] ‘A European agenda for the collaborative economy’, European Commission – Press release, 2 June 2016 http://europa.eu/rapid/press-release_IP-16-2001_ga.htmhttp://europa.eu/rapid/press-release_IP-16-2001_en.htm

 

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