Two faces of the Shared Economy: Economic expansion versus Disrupting the Market Economy

By Professor Byungtae Lee (KAIST)

Heated debate on the effectiveness of the shared economy

Solutions for job-creations versus threatening the market system

Start-up ventures recently gained world-wide attention and enthusiasm that can be comparable to the ‘Dot com’ bubble in the 1990s. Such firms like Uber or Airbnb have received unimaginable corporate value. Uber was launched in 2009 and six years later, within such a short period of time, the company is valued at $ 51 billion, far beyond GM or Ford. Airbnb is valued at approximately $ 25 billion, surpassing the value of other world-renowned hotels.

These two companies are two of the firms that pursue the “Sharing Economy”. What is the exact meaning of it? When we think of and compare these firms with a conventional concept of a firm, it is easier to understand. So far, taxi companies have possessed their own vehicles, and fixed assets, and hired drivers to provide transportation service to their consumers. Uber, on the other hand, gathers people who have their own cars and it connects people who might be interested in using the car together through a smartphone application. Uber receives a transaction fee in return for providing the service. In case of the Airbnb, homeowners post their vacant rooms for others to use for a fee, a portion of which goes to Airbnb. Like these cases, the shared economy is a concept in which individuals share their own assets; vehicles or rooms, with others for a fee.

Sharing one’s own asset ranging from cars, accommodation, and parking spaces

The shared economy is not limited to vehicles or hotels, but can be expandable to any other assets such as offices, furniture, and parking spaces. For example, a company’s cafeteria is not operated on the weekends, so a Church can use the place on Sundays. In Europe, electricity is generated by a solar energy generator in the home which is shared by neighbors.

Why do these firms receive attention from the public? First, the shared economy has innovative components that excite many consumers. For example, Uber does not let users memorize a telephone number of a driver, and the service is available with a simple click of its application. Also, by looking at comments that others left who had used the same service previously, consumers can check whether the driver is reliable and safe. In case the demand is higher than the supply, the price level changes to balance the needs of both sides.

Moreover, there is a possibility of earning more social value. With the onset of Uber, the heated competition caused taxi drivers to reach out to a place or time that they used to avoid. A recent report shows that with the implementation of the shared economy, the death rate due to drunk driving has decreased. In the US, the shared car service has reduced about $ 1.6 trillion of social cost and saved more than 500 lives.

Also, the shared economy can create more jobs, which can be a remedy for the low employment rate. In New York, about 30,000 new jobs were created over the last 3 years due to the shared car service.

In addition, the shared economy allows and opens new consumer experiences. To illustrate, Airbnb connects people from diverse backgrounds, and many of them becomes new friends by sharing spaces. Kickstarter, an online crowd funding company, has opened opportunities for many entrepreneurs to receive investment worldwide.

In sum, the concept of the shared economy has expanded to a number of areas, including the transportation, distribution, education, and finance sectors.

Conflict with the conventional business model

As the shared economy receives wide attention, there is also a growing concern about it. First, as transactions are usually a one-on-one basis, some unexpected contingencies like accidents or risks can be entailed. Last January, an Uber driver threatened one of its service riders by using a gun after a quarrel. Usually, when this kind of accident happens, a normal company compensates customers. However, in the case of the shared economy, as a company is not directly involved in the transaction, the service user could face these kinds of risk.

Also in terms of the employment benefits, as most of the participants voluntarily participate in the service, their employment welfare and stability may not be guaranteed fully.

Sometimes, the shared economy can cause conflicts with conventional businesses. Uber has received a huge negative backlash from goups of taxi drivers. Last month in London, thousands of taxi drivers came out to the streets and rallied against Uber. They claimed that Uber threatens lives without proper permission of doing the transportation business. Likewise in Korea, “Call Bus”, an application which gathers people during the night-hours and provides transportation for them, caused a conflict with a taxi drivers’ association.

Besides, some point out that the shared economy has lost its original meaning. The core value of the shared economy stems from the sharing of surplus assets, such as vacant rooms or less-used cars. Originally, Airbnb’s profit model concerned vacant rooms or rooms that are left in idle, to be made available to others who are in need and the owners can earn money out of it. However, these days, professional lodgings or accommodations upload their rooms in order to attract more consumers through Airbnb. Therefore some say that this has deteriorated the original concept of the shared economy and has been used as a marketing tool.

The shared economy received attention from consumers for its innovative and creative ideas. However, when it destroys the original market system or its meaning, then it becomes a problem. At the same time, however, when the government imposes strict regulations toward these firms, innovative firms will be cultivated. Therefore, a new solution is called for to resolve these challenges that take consideration of consumers and not for self-interests.