Democratizing the Sharing Economy

By Anders Fremstad

The internet has sharply reduced the cost of peer-to-peer transactions.  In the 1990s and 2000s, Craigslist and eBay made it much easier to buy and sell secondhand goods, and these sites now facilitate over a million transactions a day.  More recently, online platforms associated with the “sharing economy” are helping friends, neighbors, and even strangers borrow, lend, and rent goods.  Travellers can reserve a spare room through Airbnb or find a free place to crash on Couchsurfing.  People can find a ride on Uber or rent a neighbor’s car on RelayRides.  Neighbors can increasingly borrow tools, gear, and appliances free-of-charge on NeighborGoods, Sharetribe, and similar sites.  Most observers celebrate how the sharing economy lowers the cost of accessing goods, but there is a growing debate over how these online platforms should be regulated.  Unfortunately, this debate ignores how many of the fundamental problems with the sharing economy arise from its corporate nature.  The solution may not be to simply regulate the corporate sharing economy but to also democratize the sharing economy by empowering the people who use these platforms to determine how they work.

Dean Baker provides the strongest argument for regulating online platforms in his article, “Don’t buy the ‘sharing economy hype”. Like most economists, Baker recognizes “the good thing about the sharing economy is that it facilitates the use of underutilized resources.”  In economic terms, we can squeeze more utility out of a given quantity of rooms, vehicles, tools, appliances, and gear if we use these “shareable goods” more intensively.  The sharing economy has the potential to help us reduce our environmental footprints while maintaining or improving our standard of living.

But Baker argues that the sharing economy companies often compete with traditional industries on an uneven playing field.  Many Airbnb hosts do not pay the same fees that hotels pay to local governments, and Uber drivers don’t purchase the same medallions that taxi drivers (or companies) acquire.  Nor do the these online platforms require hosts and drivers to meet the same safety standards as traditional hotels and taxis.  Baker is correct that “it doesn’t make sense to essentially exempt entire classes of business from safety regulations or taxes just because they provide their services over the Internet”, but he offers little guidance about how regulations should be re-written for the sharing economy.  For example, there is a good case for requiring Airbnb to collect and pay hotel fees on behalf of its users, but should we impose the same tax on Couchsurfing, whose members host guests for free?  Should we impose the same safety standards on people who occasionally host guests through Airbnb or Couchsurfing as we do on hotels that host hundreds of people a night?

The focus on regulating the sharing economy also misses deeper problems with how the sharing economy is managed mostly by for-profit companies.  There are huge economies of scale in online platforms for sharing and redistributing goods.  The “market” is unlikely to produce a serious rival to Craigslist, eBay, Airbnb, Couchsurfing, or Uber.  Platforms are most useful when everyone uses the same one for any type of transaction, so individuals cannot easily switch to a rival platform unless many others do too.  These network externalities have serious implications for the economics of the sharing economy.  First of all, the returns to innovating in this area are very unequal: in most cases, one platform will thrive, and all the rest will fail.

Second, once any sharing economy platform is dominant, it does not need to be very responsive to its users.  Natural monopolies have little incentive to adopt policies that protect the safety and privacy of their users.  Dominant platforms can also demand a large cut of the gains arising from any transaction.  It isn’t clear that this is happening yet.  Most Craigslist posts are free.  Airbnb currently charges guests a 6-12% fee and hosts a 3% fee, which may represent reasonable compensation for Airbnb’s costs.  However, there is little reason that dominant platforms could not start charging users higher fees if they wanted to — and as more of these companies go public the pressure to do so will increase.

Third, and perhaps most problematically, the corporatization of the sharing economy can undermine the very trust on which these new forms of cooperation are built.  David Bollier argues that this is essentially what happened when Couchsurfing abandoned its non-profit status:

“When the new corporate owners and investors came on board, all of the accumulated social equity and goodwill created by Couchsurfers was essentially monetized.  A great opportunity to create a new organizational form on a vast scale was lost.”

What is the solution to all of this?  Instead of simply regulating the sharing economy we should democratize the sharing economy.  There are two key elements to this strategy.  First we should provide greater public funds to sharing platforms, at least in their early stages.  Social entrepreneurs face large obstacles in raising funds to set up user-friendly, scalable sites, and huge incentives to sell thriving sites to the highest bidder.  If the public paid more of the start-up costs — through donations, foundations, and government — we would receive more useful, and more socially responsible platforms.

Second, the people who use these sites should have more say about how these platforms facilitate transactions, protect privacy, and ensure safety.  Since people cannot effectively vote with their feet in the sharing economy, the structure of these online platforms should be made more responsive to members’ needs.  Americans already vote on how we share roads, parks, and library books, so there is no reason we cannot vote on how we share lodging, rides, and our stocks of shareable goods.  Established platforms may resist democratizing their operations, but new platforms may embrace more democratic decision-making, especially if donors, foundations, and governments made it a requirement for receiving funding.

The greatest problem with the sharing economy is not that it is unregulated, but that it is undemocratic.  There is certainly a role for government regulation.  For, example, governments could decide to charge Airbnb the same fees they charge hotels.  But governments cannot and will not regulate many important, details that govern how these platforms operate.  To improve these internal policies, we should recognize that people who use online platforms are not just “users” but rather active participants in a new movement that may radically improve how we consume goods.  Members of online platforms should be given some power to determine the structure of their interactions.  The success of the corporate sharing economy suggests that a democratic sharing economy could be truly transformative.  Instead of merely regulating corporate platforms, popular economists should address how we can build democratic platforms for sharing goods, reducing waste, and building community.


One comment

  • Hi there Anders,

    I really enjoyed your post. An even more disruptive idea we, on Swapdom, suggest to all those who want to change the way they consume is to swap. is a tool for online exchanges whose algorithm arranges circular swaps at no cost for the user but for the cost of shipping.

    Getting something that’s new, doesn’t have to be brand new, could be new to you. The idea lies at the core of what we (should) call “sharing economy”, a new way to transact.

    Thanks and sorry for the long comment, once again, I loved your approach.