Towards The Future

Sharing economy would undoubtedly live on. After all the benefits and billions of dollar profits, it is absurd to think that sharing economies would simply whither away. What remains to be seen however, is whether sharing economies would remain the way it is – bringing one and one together in an honest bid of sharing commodities, or will it evolve and change under the pressure of modernism and capitalism. As I’ve mentioned in the previous posts, unless sharing economies tweak itself to become more sustainable, it would inevitably self-combust under the pressures of unions and the invisible hand.

The last point I would want to talk about is on solving antagonisms. As no one has really written on such a view before, I struggle to isolate any meaningful research done in this area.

The first antagonism is between consumer and the government. I brought forth the point that a wedge would be driven in between consumers and the state as consumers would constantly strive to avoid regulatory actions by the government (by circumventing taxes due to definition, etc), while the state would constantly move towards the clamping down of these grey markets that sharing economies create.

The only way out of this would be to officially place a regulation on the nature of one’s behaviour. Rather than have a legal underwriting dictating taxes and tariffs on transactions, “donations” or “allowance”, the government can make it very clear by placing a regulation on the types of behaviour one commits. By placing an overarching header, sharing economies can no longer skim around the lack of regulatory definition. An example of which would be an accommodation tax on anyone living together with you. Hence, regardless of whether the accommodation sharing was done on Airbnb, actual hotels or friendly visits, a tax is still levied because it targets the very nature of the behaviour – additional people living in the city has to contribute to taxes.

Of course, a caveat would be that this is extremely hard to enforce. But if the state takes the bottom-up perspective of tracking each person entering the city, it would be easier for the regulatory body.

The next antagonism would be between consumer and producer. I argued that producers would be increasingly wary of consumers as every product they sell might show up on the sharing economy platform, becoming another one of their rivals.

This, again, can be done with regulation that seeks the mean between the two extremes. Legal laws can be placed such that a newly bought good cannot be shared for a period of a year. This way, arbitrage is avoided and companies can be ensured that those products on the sharing economy would not be their direct business rivals.

Lastly, there may be antagonism between the sharing economy platform and consumers. This occurs when a sharing economy embark on anti-competitive measures in order to secure larger shares of the market. Unlike traditional economies where price would be the main weapon in such competitive wars, anti-competitive measures of sharing economies would come in the form of a restriction of peer to peer reviews. Reviews are solely “owned” by the sharing platform and it plays a major role in consumer decision making. The sharing platform might choose to restrict these reviews only to “premium” users or to prevent their competitors from acquiring such knowledge through the privatisation of these online reviews. This creates unnecessary inconvenience and cost to consumers, akin to exploitation.

It would be wise, hence, to ensure that this public information resource remains accessible to public to prevent profits at the expense of antagonism.

In conclusion, I think that sharing economies are a fantastic idea. At the rate that it’s going, it is heading towards it’s imminent demise, not that it would totally disappear, but rather, it would be integrated into traditional systems that we are familiar with today. However, in doing so, we lose many of the benefits that sharing economy brings in its purest form – solidarity, nation building, etc. I strongly recommend governments, academia and the civil society to consider investing substantial time and money to understanding this behemoth made available to us in the 21st century. A multitude of benefit is waiting to be reaped and it would be the biggest pity of modernity if we let this slip our grasp.

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Towards Sustainability – Watertight Legal System

The Sharing Economy is enveloped by the presence of legal grey areas. Legality has always been an issue with the Sharing Economy as the very nature of the Sharing Economy aims to capitalise on the legal “loopholes” in order to make a decent profit. Over the years, as Sharing Economy become more and more available, states all over the world has been tightening up their legal policies. However, due to this grey area, many incidences still occur.

For example, in November 2012, the California Public Utilities Commission slapped Lyft, SideCar and Uber with $20, 000 in fines for “operating as passenger carries without evidence of workers’ compensation insurance.” A long, drawn out legal battle ensued as the three companies argued upon the point that outdated regulations cannot be applied to these peer to peer rental services. [1]

This incident is not isolated to vehicular sharing. In April of the same year, San Francisco implemented a policy which imposes the city’s 15% hotel tax fees on Airbnb and similar accommodation sharing sites. This was met with fierce outrage as Airbnb argued that these taxes cannot be applied to modern, internet based business models on account that they were outdated. [2]

State authorities have been, for a long time, trying to write up legal structures and documents in order to properly regulate this market, that left unchecked, could pronounce unfair advantage to traditional economies. However, Sharing Economies have so far been rather successful at skimming around these legal documents due to the fact that it is difficult to settle on a definition on something so transient as peer to peer loans.

For example, in order for Lyft, Sidecar and other such transportation services to avoid legal taxes and regulatory barriers, they changed their business model to not include a standard billing (hence avoiding taxes). Instead, passengers are prompted to give the drivers a voluntary “donation”. Passengers that do not comply or give inadequately face bad reviews, preventing them from using the system again [3]. Changing the terms of this payment caused much chaos in the legal framework and millions were spent on legal agreements.

Apart from vehicular sharing, accommodation sharing has also received much heat from the legal authorities. Due to the shortage of long term rental opportunities and the inability to regulate short term rentals, many states, especially in the US ban rentals of less than 30 days unless special license and inspections are paid for and carried out [4]. Likewise in Singapore, peer-to-peer subletting of HDB houses are illegal and if transaction of money takes place, the individual must be prepared to face severe fines and possible jail terms.

However with all these examples, I am firmly against the idea that banning these sort of transactions and rental is not the way forward. Rather, it becomes more of an oppressive tools used by the government as a warped form of paternalism. Instead, more have to be invested into the underwriting of legal structures. Definitions have to be broadened and agreed upon. Systems have to be made watertight and the legal grey area has to be minimized, if not eradicated. Otherwise, it will be a wild goose chase between the sharing economy and the legal authorities, each trying to undercut each other. This represents the new, modern-edge anti competitive laws and it is important enough for governments around the world to put serious thought into it.

 

 

[1] & [2] & [3] & [4] – All eyes on the sharing economy. (2013, Mar 09). The Economist, 406, 13-S.15. Retrieved from http://libproxy.smu.edu.sg/login?url=http://search.proquest.com/docview/1315947560?accountid=28662

Towards Sustainability – Balancing the Playing Field

Over the course of the past few posts, we have been talking about the disparity in consequences between the major actors of the economy. We’ve talked about how it does not matter that the benefits of sharing economies outweigh the economic, environmental and societal cost, if the benefits and gains are inequitable.

Hence, following naturally from this pretext, our next move in our strive towards sustainability is to level the playing field for all companies – both that of classical economies and that of sharing economies. Only after the barriers to entries and costs have been fairly moderated and transactional cost and taxes are made fair, can we achieve any sort of optimal equilibrium.

Currently, there is a multitude of taxes faced by large companies as they try to establish their presence in a market. For example, major hotel chains have to pay a huge sum in additional cost. They’re required to foot the bill for liquor license in order to sell alcohol. For example, in Singapore, establishments are required to pay $1,750 per outlet if they desire they sell alcohol [1]. Large chains are also under strict regulations to conduct (and pay for) regular kitchen inspections for cleanliness and hygiene. These inspections adds to the operational cost of the chain, without even taking into account the extra cost it takes to get the establishment up to mark. If the establishment fail these inspections, they may expect to face heavy fines.

On the flip side, small “operators” of sharing economies do not face these additional cost. They manage to skirt around regulations that governs larger organization. Because they are registered as private owners (of homes, cars, etc), they avoid paying the operational cost usually imposed on corporations. This starts to be a problem because now, these operators are competing with a much lower cost margin than the larger scale business chains. This unfair advantage would tip the scale in favour of sharing economies. This would represent a supply side slide towards sharing economies. I have covered the consequences of this in my previous blog posts.

One might argue that larger corporations can capitalise on the fact that they have economies of scale, by nature that they can consolidate and streamline their operations. However, this is to no large extent if we consider the different operative types of sharing economies, most of whom cannot be standardised in the first place (for example, taxi drivers vs Uber drivers).

The solution naturally would be two fold. First, broad, overarching taxes have to be implemented across the board, both to sharing economies and to large MNCs. These taxes needs to be tailored due to the proportional size of the operation. This would represent the most feasible way of ensuring fair competition. For example, in the city of Amsterdam, people subletting their homes have to pay an additional income and tourist tax. They are also subject to fines if their occupants misbehave.

Another solution would be to subsidise companies in traditional economies. An example would be to subsidise costs of traditional taxi drivers by paying for their courses and driving exams as well as awarding good driving. This would level the playing field between these drivers and the new sharing economy drivers, leading to more equitable results.

 

 

 

 

[1] – https://licences.business.gov.sg/SHINE/sop/WebPageHandler?p=OASIS&pn=SelectLicences&LicenceID=2957&ss=FAQ

Towards Sustainability – Arbitrage

Arbitrage is the simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.” [1]

Arbitrage is toxic to any economy. It represents a loophole, a faulty structure or system that is detached from the governing mechanisms that regulates the economy. Arbitrage occurs when there is no self-correcting feedback cycle, and if this is left unchecked and unchallenged, it would prove to be the beginning of the end for sharing economies.

Arbitrage occurs in the sharing economy when one can exploit a product for instant gains. Consider the extreme case of a Netflix subscriber. His subscription fee costs $20 a month to rent an unlimited amount of DVDs. He then rents three DVDs from Netflix. Taking this three DVDs, he then loans out each of these DVDs to other individuals at $1 a night. Assuming that he is able to loan out the DVDs for the entire month, the Netflix subscriber, in a space of a month, has earned 3*30*1 = $90. Making his profit an amazing $70, considering that he did not own the product in the first place. [2]

That hence represents a problem in the sharing economy that can be replicated on a wider, more disastrous scale. If the subscriber can make an instant profit of $70 for 3 DVDs, what is stopping him from expanding to 30 or 300 DVDs.

This has immense repercussions as it drives down the demand for Netflix – the original source of the DVDs. With this drop in demand, and by extension the profits of the movie makers, movie makers have a reduced incentive to continue creating movies. By allowing individuals to make quick short term gains, society eventually loses out in the long term as they are unable to enjoy as many good quality movies. This myopic gains have to be snuffed out in order for societies to thrive.

There is an alternative argument, from a classical economics point of view, that the individual will eventually face competition in his second degree loaning out of DVDs by competitors also interested in a quick profit. This levels the playing field till a point where the market would be indifference between paying the individual for the DVD or paying for a Netflix subscription.

However, this is far from a feasible solution, while the individual do not bear operational cost, he also does not add to the value of the product. Value-adding is an extremely vital portion of economical growth and neglecting that, or even opening up the option of earning possible revenue without doing, so would be the height of folly.

The way forward hence is to impose a sort of blanket taxation to deter opportunities for arbitrage. This increases the cost of operations for such an individual, making it unprofitable. This would mean that the revenue from production actually goes to the correct source.

Another alternative is to impose and enforce strict royalties that has to be paid to the party involved in the production. For our case earlier, this would mean that the individual have to pay a certain sum of money for every day that he loans the DVD out. This helps to alleviate the cost that the production company bears.

 

 

 

 

 

[1] – http://www.investopedia.com/terms/a/arbitrage.asp

[2] –  Arvind Malhotra and Marshall Van Alstyne, 2014, The Dark Side of the Sharing Economy and How to Lighten It

Towards Sustainability – Indemnity

In 2013, amidst the festivity of New Year’s eve, an off duty Uber driver was patrolling the streets of San Francisco, in a bid to get more customers. He was involved in an accident, hitting three pedestrians, including one six year old girl. The six year old girl died after being rushed to San Francisco general hospital.

Within hours, Uber released a statement insisting that since the driver was not carrying any Uber passenger at the point of the accident, Uber was not liable for any compensation or reparation to the affected victims. Since the driver was merely a contractor and not an employer, Uber essentially distanced themselves away from the case and refused to pay compensation to the victim’s family. [1]

This is a commonplace example of how sharing economies transfer risks away from themselves onto their users. Using blanket terms such as “non-employees” or “contractors”, sharing economies manage to elude the legal boundaries of traditional employer-employee relationship. Hence, cases such as the one above becomes one of the many issues plaguing the sharing economy.

A harsher depiction of this scenario may accuse these sharing economies of luring their users into taking tangible benefits at the expense of taking on intangible risks (a new Uber driver would only be concerned about his profits and not worry about the fact that he might get into an accident).

Without the backing of the giant corporation, the users of these sharing platforms are left extremely vulnerable. All it takes is a couple of similar high profile cases to infiltrate the mindset of the consumer base, and sharing economies will once again lose all its credibility, heading towards its likely doom. Again, the inequity of benefits and risk prove to be the cause of this possible path.

What Sharing Economies can do, hence, is to reverse this trend of shirking away from risk. Rather than playing a game of shifting the risk away from themselves onto their customers, sharing economies must learn that protecting their customer base is indeed a worthwhile strategy. As Sharing Economies mature, no longer can they resort to cheap, childish tricks to avoid commitment and responsibility. Sharing Economy simply has to start indemnifying their “contractors” and “users” in order to amount to anything sustainable.

 

Perhaps Sharing Economies can look towards Airbnb as a model to internalising their risk.

In a particularly well publicised incident, an Airbnb host sublet his apartment, only to find that the renters used it as a party venue, effectively trashing the entire house. Airbnb’s patronage dropped incredibly following the publicity of this news. No one dared to rent out their house via Airbnb for fear of a similar incident.

Airbnb followed up by implementing their “$1,000,000 host guarantee” [2]. Insuring their hosts of damage reparation up to $1 million. This fee creates a sense of protection once again amongst hosts. The move to protect their host turned out to be a good one as Airbnb climbed to become the biggest accommodation sharing economy in the world.

History as well teaches us that indemnifying and taking up insurance for patrons is a wise move. Banks in the past were afraid of movements such as the Fair Credit Reporting Act (FCRA) as they fear that it would promote fraud and careless usage of credit cards. However, this turned out to be extremely profitable for the banks. Not only did fraudulent cases drop, bank patronage increased greatly. The moral of the story is that the banks eventually learned that holding customers to minor risks is a bad business strategy. Protecting their customers from them, is extremely good business.

Sharing economies can hence learn from these two examples, one from the past, another from one of their own, in a bid to forge its own sustainable future.

 

 

[1] – https://pando.com/2014/01/02/uber-driver-hits-kills-6-year-old-girl-is-not-our-problem-still-an-appropriate-response/

[2] – https://www.airbnb.com/guarantee

Towards sustainability – Trusted rating system

This post marks the start of a series of 5 posts which addresses the issue of sustainability of the sharing economy. Before, I have concluded that the sharing economy was not sustainable purely because of the fact that the benefits and detriments of this sharing economy are not equitable. Some parties are at the receiving end of the bulk of the benefits while other parties suffer the greatest consequences. Our movement towards sustainability hence aims to address the issue of equitable distribution of pains and gains. Without this, the sharing economy would just remain as a volatile cocktail of uneven and disproportional movements that threatens to implode this method of transaction from within.

Earlier on, I wrote about how important peer review system is to the sharing economy. Like the rise of online shopping over the internet, sharing economies only became widely accepted as a method of transaction after like minded peers tried it and gave it their thumbs up. This seal of approval from fellow consumers helped to grow the sharing economy’s consumer base exponentially.

As sharing economies grow, this element still remains a vital part of the system. There is a great temptation for companies, in a bid to increase their sales and receptivity, to falsify some of this reviews. Having a greater percentage of positive reviews would undoubtedly increase their sales in an age where there is minimal information asymmetry. It would be extremely beneficial to the company if they have large amount of positive reviews as the company would be placed ahead of their competitors with lousier reviews. This impact has the potential to snowball.

For example, a study carried out in 2013 by Michael Luca and Georgios Zervas [1] revealed that approximately 16% of Yelp’s restaurant reviews are fraudulent. This came about due to the algorithm encoded into their system. This created a great amount of distrust among constant users of Yelp, who are unsure which ones are genuine reviews. The number of users of Yelp has hence dropped significantly.

This is just an isolate case of consumers losing their trust in one particular system. If this happens on a wider scale, consumers may lose their trust in the sharing system entirely. Even non-fraudulent companies would be tarnished with the same stroke of the brush. Sharing Economies would naturally die down.

To avoid that, it is crucial that a sort of governmental regulatory body is set up to validate these reviews. This might come in the form of audits, or having stricter checks on the backgrounds on posters before they are even allowed to post. This would clamp down on any bad or bias reviews.

Stricter punishment on companies that decide to falsify their reviews in a bid to gain market edge over their rivals must also be implemented. This sort of anti-monopolistic ruling forms a sort of deterrence against unsatisfactory behaviour.

Sharing economies must work extremely hard to protect the sovereignty of these reviews as the entire structure of sharing economies are built on the  principal of sharing of information from one consumer to another. If this fundamental pillar crumbles, the sharing economy would soon follow.

 

 

[1] – http://www.immorlica.com/marketDesign/Harvard/reading/fakereviews.pdf

What Next? [2]

[…Cont]

Another exploratory case study that I looked into was Homejoy, the failed sharing company that intended to match home-owners with house cleaners. First, I stumbled upon the realisation that at the end of the day, the success and failure of sharing economies does not boil down to the novelty of sharing, but rather, that price is still the major determinant of consumer behaviour. It just happen that sharing economies are more efficient at by-passing taxes and regulations, leading to a more economical price, such that consumers readily flock towards these economies.

My analysis of Homejoy also reveals certain pitfalls that sharing economies have to avoid in order not to follow in the pathways of Homejoy. While demand factors are motivated predominantly by price, sharing economies still have control over supply side factors. This include:

  • the unclear categorisation of Homejoy’s workers, leading to susceptibility to lawsuits
  • sharing economies have to be have a sustainable design – with regards to economical, environmental and societal impacts
  • a watertight business strategy (Homejoy wrote itself out of the operations)
  • good business acumen

Lastly, I found myself going too much in the direction of economical and environmental “tangible” impacts that I neglected the societal impact of sharing economies. I attempted to explore the question “What does sharing economies truly mean for the heart of society?”

The major benefits are summarised here:

  1. Sharing brings about an element of unity and solidarity that have been compromised by excessive capitalism
  2. Contribution to national building without the loss of opportunity cost to GDP
  3. Disrupt and decentralise current economies that are rooted in egoism and self-absorption
  4. Emphasis on traditional values of loyalty, family and concern for others without sacrificing economical growth

The major short comings are also summarised here:

  1. Establishment of tax avoidance and blackmarkets promote mutual distrust and disunity between citizens and governments
  2. Transformation of traditional economy’s customers to business rivals in the sharing economies promotes antagonism between consumers and firms
  3. This is made worse as consumer and firm constantly try to transfer their risk to each other

 

Moving Forward

From the reflections of the past 14 blog posts, we are able to attain a clearer picture of what Sharing Economy truly represents. However, this effort would be moot if we do not look at actionable steps that we can take in the future. The current trends are clear – Sharing Economies are not sustainable in the present. I dare make this bold statement because of one fact. After analysing the benefits and costs of Economical and Social impacts, as well as the demand and supply side considerations of Sharing Economies, what remains certain, and also the most important issue, is that the pros and cons of sharing economies are not evenly spread out. There is major inequity in the fact that some parties receive majority of the shortcomings, while other parties receive the bulk of the benefits. This spins our entire socio-economical and environmental discourse in a direction that causes a build up of tensions that would only result in society imploding upon itself. On the offset, it seems like through regulatory biasness, Sharing Economies and its users are put on the unfair advantage at the expense of traditional economies and its users. The only way to achieve sustainability is if we are able to balance out the share of pains and gains.