The Tragedy of the Sharing Economy
Is there a better way forward?
On the eve of Uber’s IPO, expected to be one of the biggest in history, Uber’s drivers, the largest part of its workforce, are staging a 24-hour strike in cities around the world. With the average wages for Uber drivers around $10/hour after expenses and Uber “constantly fiddling with how drivers are paid”, their frustration is understandable. Drivers are fighting for transparency in their compensation and fair pay. The Sharing Economy has been one of the most significant technological, economic and social breakthroughs of this century, but it is still early in its development — version 1.0. Could a thoughtful reimagining of the relationship between a Platform and its Participants bring us to a fairer and better outcome for all?
The Sharing Economy has exploded in the last decade with the advent of peer-to peer-networks, the reputation system inherent to social media and the convenience of mobile technology. From Uber to Airbnb, some of the most disruptive and successful technology companies have been built on this model. Many of the challenges in the Sharing Economy stem from the reality that it is not truly a “sharing” economy at all, but more precisely “an access economy.” Consumers are paying to access someone else’s (a Participant’s) good or service for some period of time. These Participants, who are essential to the success of the Sharing Economy business’ Platform, have little to no voice or control over the direction of the business. They lack transparency and the rules can constantly change. The model also has challenges for the Platforms — Participants are transient and ambivalent between competitors. We have all seen this firsthand, getting picked up in a ride-sharing car with both Uber and Lyft stickers on it. In fact, Uber has seen its driver retention rates decrease significantly over time and the cost to recruit new drivers is its largest single operating expense.
The “Tragedy of the Commons” as coined by Garrett Hardin in his famous late 60's paper of the same name identified the inherent flaw in the sharing of a common resource with no governance or laws — “freedom in a commons brings ruin to all”. In its current form, the Sharing Economy has its own tragedy. The Tragedy of the Sharing Economy is that as these Platforms grow they gain more and more of the value and the Participants providing the work accrue less and less. Just like in the Commons there are negative externalities that significantly impact the Participants and Consumers over time — the Platforms control all key network and consumer data and as a result they end up with nearly all of the economic value.
The History of the Sharing Economy Starts with the History of the Firm
To go into depth on the Sharing Economy, it makes sense to start with a very brief overview of the history of the firm. Ronald Coase was the first to theorize in 1937 about “The Nature of the Firm.” He argued that people organize into formal institutions, firms, when market transaction costs are too high. These transaction costs consist of four key components: (1) the cost of finding a counterparty, (2) negotiation of a contract, (3) ensuring compliance with the contract, and (4) in the event of a breach, enforcement. “Coase argues that firms exist because some transactions internal to firms are less costly than similar transactions carried out in markets.”
How the Sharing Economy Is an Evolution of the Firm
The Sharing Economy seeks to minimize all four components of transaction costs through a centralized network that establishes rules for the market participants and serves as the centralized compliance and enforcement organization. “Sharing economy enterprises realign the ownership and control structure by minimizing the cost of marketplace transactions and reducing the need for aggregating large amounts of capital within a single firm. Transactions previously more efficient when centrally coordinated have become efficient as marketplace transactions.”
Initially, the Sharing Economy focused on the monetization of underutilized assets by leveraging a centralized network — vehicles (Lyft, Uber), real estate (AirBnB, VRBO), and other assets (bikes, lending, etc). These marketplaces tended to involve transactions around assets where without a dedicated marketplace the benefits of “renting” out the asset would have been small and inefficient in comparison to the effort required to find a renter. One could have (and some did) rent out couches for the night on Craigslist, but only with dedicated Platforms like Couchsurfing and Airbnb did the process become seamless, efficient and profitable for short-term rentals. The Platforms were able to lower the transaction costs for Participants and Consumers to enter the marketplace, thus creating a new market for these underutilized assets.
Too Powerful for Just Underutilized Assets — The Sharing Economy Goes Mass Market
Interestingly, over time, these Platforms became so successful as a means for monetizing underutilized assets that we see a professionalization of the Sharing Economy’s Participants. The Sharing Economy is no longer solving an “underutilization of assets” problem — it is creating a new opportunity for employment. Professional hosts (Participants) make up much of Airbnb’s revenue. The City of New York found that almost half of Airbnb’s revenue in New York City in 2010 came from users with more than three listings. On Lending Club, the majority of loans come from institutional investors. And Uber and Lyft have led to far more cars on the road in their markets as drivers look to those Platforms as employment opportunities.
The Sharing Economy model across different industries (Source)
The Sharing Economy Network Effect
The Network Effect inherent to these Platforms is best described by Chris Dixon, who noted that “Centralized platforms follow a predictable life cycle. When they start out, they do everything they can to recruit users and 3rd-party complements like developers, businesses, and media organizations. They do this to make their services more valuable, as platforms (by definition) are systems with multi-sided network effects. As platforms move up the adoption S-curve, their power over users and 3rd parties steadily grows.”
Source: Chris Dixon, “Why Decentralization Matters”, Medium
Google, with search, and Facebook, with social media, have built the largest scale network effects in the Internet today. They are mature, large scale networks that accrue nearly all the value (i.e. revenue) their Platforms generate. In the case of the Sharing Economy, it is still fairly early days — Airbnb is only 10 and Uber 8 years old. Over time we expect these Sharing Economy Platforms to continue to gain power over their Participants. Just like Google and Facebook, the reduction in transaction costs leads to the Platform’s centralized accumulation of data that becomes an extremely valuable commodity. This data asymmetry leads to big advantages for the Platforms and a lack of transparency for the Participants. This is why Uber drivers have to contend with Uber “constantly fiddling with how drivers are paid, most recently dropping its commission structure for a new system that pays drivers on more of a metered basis.” This lack of transparency makes it nearly impossible for drivers to have a real understanding of what they can expect in a paycheck from week to week — even MIT economists are struggling to understand the true median wages since there are so many hard to measure costs.
For the Participants in the Sharing Economy, this power dynamic is concerning at best and untenable at worst. There have been a few attempts at a transparent and Participant-focused approach, most notably with Juno in NYC. Juno saw a flood of drivers to their platform when they offered 10% fees and equity participation vs. Uber’s 20–30% cut at the time. Unfortunately when Juno was acquired shortly thereafter, the company started backing out on its earlier promises. This is not to say that all of the large Sharing Economy companies are ignoring this issue. In fact, Airbnb recently petitioned the SEC to enable them to distribute equity grants not just to employees but to hosts. “Airbnb believes that twenty-first century companies are most successful when the interests of all stakeholders are aligned” and we absolutely agree.
Governing the Commons and Blockchain — a Path Forward
Elinor Ostrom’s seminal work that earned her a Nobel Prize in Economics, Governing The Commons, looked at true Sharing Economies, or as she referred to them Common-Pooled Resources (CPRs), in various examples around the world — from shared fisheries to common irrigation resources. The Participants were the Consumers. This allowed for effective self-governing by the Participants with long-term stability of the shared resource. None of these examples were true marketplaces as no goods or services were sold, which begs the question:
Could A Marketplace with a Monetary Exchange Be Self-Governed?
For a marketplace where money is exchanged, some central firm has always existed to service the four core transaction costs of the firm: (1) the cost of finding a counterparty, (2) negotiation of a contract, (3) ensuring compliance with the contract, and (4) in the event of a breach, enforcement. And for doing this they have always retained and kept to themselves the transaction data which leads to their network effect and long-term advantage. For Participants to transact peer to peer without the need for a central Platform would require a system that was transparent, equally accessible, immutable and verifiable — in other words, they would need a secure, scalable distributed ledger. With a verifiable and immutable blockchain that gives all Participants equal access to market data while protecting Consumer privacy, Participants can compete fairly with data symmetry without the Platform itself building an unfair long-term advantage. “By (Uber’s) own admission, the specifics of what drivers were taking home versus what Uber was making was a black box.” This data asymmetry is a fundamental problem for the Participants and something we believe can be solved with transparent data verifiable through a blockchain.
Additionally, with decentralized governance, there is the opportunity, through voting rights, for the Participants to be involved in the evolution and direction of the Platform. These voting schemes can be very diverse in execution and it is still early days in experiments in decentralized voting models, but we see them as a critical component of the Sharing Economy 2.0.
At Wander, we have been motivated to find a better Sharing Economy model. We have taken an approach that is influenced by the work of Ostrom and others to look at empowering Participants in an industry ripe for community-driven disruption — internet service. We are building a community-powered internet service provider that allows anyone to invest in some affordable hardware, contribute internet infrastructure on the Wander network and get paid for data transmitted across their hardware. We use a distributed ledger to provide Participants with full transparency into the data they are contributing to the network and the share of income they earn. Over time, we intend to introduce additional layers allowing for the Participants to have meaningful voting rights and significant influence over the future direction of the Wander Platform.
We believe that with blockchain and effective Participant governance we can build a future of the Sharing Economy that is finally egalitarian.
David Fields is the co-founder and CEO of Wander. Wander offers high speed, low cost and completely unrestricted access to the web powered by innovative technology and our community.
Sincere thanks to Eric Dwoskin for his extensive research and contributions and to Travis Marchman, Tucker Waterman and Dan Rahmel for all your helpful edits and suggestions.
REFERENCES
Hardin, Garrett. “The Tragedy of the Commons”, Science, December 13, 1968
Rosen, Sherwin, Transactions Costs and Internal Labor Markets (October 1987)
Mark Anderson, Max Huffman, The Sharing Economy Meets the Sherman Act, 2017 Colum. Bus. L. Rev. 859, 868 (2017)
Kellen Zale, Sharing Property, 87 U. Colo. L. Rev. 501, 527–28 (2016)
Abbey Stemler, The Myth of the Sharing Economy and Its Implications for Regulating Innovation, 67 EMORY L.J. (2017)
Henry Hansmann, Reiner Kraakman, and Richard Squire, “Law and the Rise of the Firm,” Harvard Law Review 119 (2006)
Walter Werner, “Corporation Law in Search of Its Future,” Columbia Law Review 81 (1981), Ronald H. Coase, “The Nature of the Firm,” Economica 4, no. 16 (1937), available at http://www3.nccu.edu.tw/~jsfeng/CPEC11.pdf.
Rosen, Sherwin, Transactions Costs and Internal Labor Markets (October 1987). NBER Working Paper No. w2407. Available at SSRN: https://ssrn.com/abstract=977435.
Bryant Cannon and Hanna Chung, “A Framework for Designing Co-Regulation Models Well-Adapted to Technology-Facilitated Economies,” Santa Clara High Technology Law Journal 31 (2015)
Gene Marks, The Other ‘Sharing’ Economy That’s About to Change the World, Forbes (August 18, 2014, 10:47 AM), http:// www.forbes.com/sites/quickerbettertech/2014/08/18/the-other-sharing-economy-thats-about-to-change-the-world/
Rachel Botsman & Roo Rogers, Beyond Zipcar: Collaborative Consumption, Harv. Bus. Rev., Oct. 2010, at 30, 30, available at http://hbr.org/2010/10/beyond-zipcar-collaborative-consumption/ar/1 (including redistributive markets in the overview of types of sharing).
Georgios Zervas, Davide Proserpio & John W. Byers, The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry 2 (Bos. Univ. Sch. of Mgmt. Research Paper Series №2013–16, 2014), http://questromworld.bu.edu/platformstrategy/files/2014/07/platform2014_submission_2.pdf [http://perma.cc/88EC-GR93]
Arun Sundararajan, Why the Government Doesn’t Need to Regulate the Sharing Economy, Wired (Oct. 22, 2012, 1:45 PM), http:// www.wired.com/2012/10/from-airbnb-to-coursera-why-the-government-shouldnt-regulate-the-sharing-economy/
Abbey Stemler, Feedback Loop Failure: Implications for the Self-Regulation of the Sharing Economy, 18 Minn. J.L. Sci. & Tech. 673
https://www.bloomberg.com/quicktake/sharing-economy
http://newsletters.briefs.bloomberg.com/document/4vz1acbgfrxz8uwan9/timeline
