What makes Uber and Airbnb flourish while others fail in ‘sharing economy’?
Not all who join the “sharing economy” find riches, but those who do are discovering a very lucrative business model that enables millions of people to rent their underused goods.
While many sharing-economy models, such as Uber and Airbnb, are thriving, there are just as many that have failed to make money. Transaction costs and transportation play significant roles in their demise or success, according to a Clemson University economist’s research.
“Some of these sharing-economy models started strong and were very profitable,” said Kevin Tsui, associate professor in the John E. Walker Department of Economics at Clemson. “But over time, many platforms waned as users’ enthusiasm didn’t match their actual use of the service. In the end, some of these businesses had many more people eager to lend their goods than they had people wanting to use them.”
From a consumer’s viewpoint, the principle of the sharing economy business model is quite simple: Why spend significant money – and in some cases time – when you can get what you want from one of these online peer-to-peer rental businesses for a fraction of the cost?
Tsui said the transportation and vacation rental businesses, many of which were founded after the global economic downturn in 2008, benefit from the sharing economy model because of the low transaction costs.
“The sharing economy platform reduces transaction costs significantly for businesses like Uber and Airbnb. Costs are low for these businesses to identify potential buyers, to verify the quality of goods and services provided, and for contract enforcement,” Tsui said.
But for all the Uber and Airbnb success stories there are just as many collaborative-user models that failed, including the tool-rental business, Tsui said.
SnapGoods allowed people to rent their underutilized surplus tools. But transportation costs and time figured strongly into the failure of the power tool sharing business.
“Today, a power drill can be purchased for less than $30 and delivery can be had in a day – or less,” Tsui said. “A user has to ask, does it make sense to pay $15 and maybe having to drive to pick up a tool, when you can own one for not much more?”
Businesses like house-cleaning start-ups face obstacles unlike Airbnb and Uber.
“In the cases of Airbnb and Uber, their customers typically do not repeat business with the same landlord or driver, which lessens the chance of ‘post-contractual opportunistic behavior,’ or cheating,” Tsui said. “The driver-for-hire and property rental businesses are unlike home-cleaning services, which have lower rates of customer retention.
“House cleaners continually come in contact with the customer, so it’s much easier for deals to be cut between customer and contractor to avoid paying commissions to the online sharing platform,” Tsui said. “Home-cleaning platforms, for example, have a tendency to lose more businesses due to the ease in which the customer and cleaner can work out their own contracts.”
Tsui said many of the sharing economy start-ups also face obstacles in legal liabilities, government regulation and contractual agreements.
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