Harnessing the Potential of the Sharing Economy

By Anders Fremstad

New York City Classic

American capitalism generates an astounding amount of waste.  Nowhere is this more clear than in our hugely inefficient transportation system.  In the United States, the average private vehicle is driven only 1 hour a day and transports just 1.7 passengers.  But the sharing economy is starting to change how Americans get around.  A 2014 poll by the Center for a New American Dream reveals that 9% have used car-sharing services like Zipcar and RelayRides, and 8% have used peer-to-peer taxis like Uber and Lyft.

As these online platforms gain traction, criticism of the sharing economy is growing as well.  Uber, which created a ride-sharing app that is now valued at $40 billion, attracts special attention.  In a debate at Cato Unbound, Dean Baker argues that Uber competes unfairly with traditional taxi services, because it does not require its drivers meet safety standards, carry commercial insurance, or acquire a taxi medallion.

Local governments struggle to effectively regulate global companies like Uber.  While some cities have attempted to set rules for how Uber may operate, they often fail.  In recent article, Its Already Over and Uber has Won, Johana Bhuiyan describes Uber’s basic strategy.  The company moves into cities without regulators’ approval.  If local governments try to ban the service, the company often offers to pay legal fees for drivers who break the law.  Once Uber builds a critical mass of drivers and riders in a city, it presses governments to rewrite regulations.  So far, Uber’s strategy has been remarkably successful.

Given how difficult it is to regulate, some economists have made the case for socializing Uber.  Mike Konczal and Bryce Covert argue “a transition to workers’ owning their firms is necessary, economically smart, and one way for workers to gain power in the digital age.”  There is a good case for democratizing the sharing economy.  Online platforms like Uber are natural monopolies.  As more people use Uber, the platform can better match riders and drivers, while the cost of facilitating the marginal ride is basically zero.  Companies like Uber can abuse these  “network externalities” and “economies of scale” to vanquish competitors and gouge users by demanding a huge cut of the transaction.  That said, it’s important to recognize that sharing economy platforms are not the only tech companies that have the potential to abuse their users.  The commanding heights of the 21st century economy are controlled by natural monopolies like Comcast, Google, and Facebook.  If there is a case for socializing Uber, there is a case for socializing the rest as well.

More importantly, transforming Uber into a worker cooperative could raise drivers’ wages, but it would not harness the full potential of the sharing economy.  Uber has disrupted the taxi industry, but it has failed to  significantly decrease the number of vehicle-miles traveled.  Although it’s easier now to get around without owning a car, taking a (regulated or unregulated) taxi from point A to point B is no better for the environment than driving yourself.  What we need is a service that uses existing technology to seamlessly coordinate real-time carpools.  Drivers and riders could simply plug their final destination into an app, and the service could quickly match riders with drivers who were already going along the same route.  An app could easily split the travel costs, providing an incentive for drivers to pick up riders, and providing riders with a cheap and convenient alternative to car-ownership.

In this model of ride-sharing drivers would earn less than Uber drivers, but they wouldn’t be exploited cabbies, they would be ordinary commuters trying to save a buck – and the planet.  Digital technologies should make most taxis redundant.  (Next time you’re waiting for a cab, think about how many of the passing cars are going the same direction.)  There’s no reason we can’t use mobile internet, GPS, and reputation systems to take advantage of America’s ridiculously low vehicle occupancy rates.  Doubling vehicle occupancy through digital carpooling would decrease vehicle miles, reduce emissions, and complement mass transportation by helping riders complete “the last mile” of their trips.

Facilitating digital carpooling may be more difficult than building an unregulated taxi company.  Since most car owners only drive a couple of routes a day, digital carpooling would require a larger critical mass of users than a taxi service like Uber.  But keep in mind that we have already overcome what would have seemed to be the greatest obstacle to ridesharing a decade ago.  Thanks to Uber, we know that most people are perfectly happy to hop in a car with stranger to get where they need to go.

BlaBlaCar facilitates inter-city carpooling in Europe, but big players like Uber don’t seem to have much interest in promoting real ridesharing.  Why not?  Digital carpooling probably looks less profitable than running unregulated taxis.  Uber currently takes about 20% of a rider’s fare.  In digital carpooling riders might pay half the current rate, so the company would have to charge 40% to “earn” its normal profit.  Demanding that large of a cut could seriously turn off carpoolers, especially since the actual cost of matching riders and drivers is basically zero.

So, yes, there’s a strong case to be made for transforming digital taxi services into worker cooperatives.  However, there is an even better case to build a real ride-sharing service that takes advantage of the 3.3 empty seats in the average American vehicle on the road today.  If capitalist firms won’t invest in digital carpooling, then people and governments should.  Whether it takes the form of a public utility or users’ cooperative, a platform built on real cost-sharing — rather than profit maximization — is our best bet for harnessing the power of the sharing economy to reduce waste, protect the environment, and improve everyday life.

 

2 comments

  • Anders, it’s an excellent article. I have a couple of comments :
    a) I do think it will be difficult for people to hop in on a stranger’s car. It might be fine for a short distance, on broad daylight, on a well travelled route in cities, but otherwise, there is always the risk. Ubers still has specific drivers, with their info in some archive and they can be tracked. But one commuter driving to work sharing with another is a different proposition. The idea is excellent if it can be made to work, but I am thinking of the psychological barrier that might hinder such an effort.
    b) What do you think of more investment in public transport i.e. buses and commuter trains among cities or tram service inside cities? If you hope government and/or public should start such efforts, why not large scale commuter vehicle as buses rather than ride-sharing? I am curious for an economists view on the subject.

    • Anders Fremstad

      I think a digital carpooling service could store the same information about drivers (and riders) as Uber currently does, so I don’t think it would be less safe or face greater psychological barriers. Indeed “casual carpooling” or “slugging” (http://www.slug-lines.com/Slugging/About_slugging.asp) have been successful thrives in some communities without any sort of formal reputation system. It seems to me that we should be able to use the internet and mobile technologies to make this form of decentralized cooperation attractive to more people.

      I strongly support investments in mass transportation, because I think that digital carpooling and mass transit are complementary. The key is making it possible for Americans to get where they want to go without owning a car. Digital carpooling, mass transit, and bikes are all part of the solution. But it’s worth noting that currently about twice as many Americans carpool to work as take mass transportation, even though there is almost no public support for ridesharing. I think very small investments in digital carpooling could generate large economic and environmental benefits.