Rapid advancement in technology has resulted in the emergence of innovative business models. One such model is the sharing economy which has made sharing assets easier and cheaper than ever before. Supporters of the sharing economy model cite that it benefits consumers with aspects such as convenience, availability, low cost, and efficient transactions (Schor 2). People who rent their stuff on various sharing service platforms point out that they have the ability to earn more money and enhance their economic opportunities. On the other hand, opponents of such models claim that sharing does not entail exchanging of money and that the companies are using this notion for their self-interest (Schor 3). Also, they argue that such companies evade government regulations unfairly. The sharing economy model is rising steadily, and though it brings benefits to lots of people, it also comes with threats to various sectors of the economy.
The Economics and Statistics Administration of the United States Commerce Department defines the sharing economy model as having four characteristics. First, the sharing platforms utilize information technology to enable peer-to-peer transactions. Secondly, such systems usually depend on user ratings for quality control as well as to ensure a higher level of trust between the transacting parties. Thirdly, the platforms offer service providers flexibility in choosing their working hours. Lastly, service providers use their own tools and assets since the platforms do not provide them. The characteristics assist in defining and identifying companies that operate in this emerging business sector.
The sharing economy platforms work on the model of peer-to-peer exchanges that make use of communities consisting of collaborating individuals. Such schemes offer service providers with extra income while at the same time ensuring affordability and convenience for borrowers ("The Rise Of The Sharing Economy" par. 5). Many people view occasional renting as cheaper and convenient than purchasing the same thing from a traditional provider such as a car-rental firm or a hotel. The efficiency and convenience of such systems are increased by the popularity of the internet and wide usage of smartphones. While such systems may be susceptible to distrust, recommendation systems and online social networks assist in establishing the trust for users. All these benefits allow millions of people to rent things to one another without necessarily knowing the other person.
As of now, the most common sharing services are those that deal with cars and accommodation. Examples of accommodation sharing services include Airbnb, Roomorama, BedyCasa, and Wimdu. Car-sharing services include Uber, Buzzcar, RelayRides, SideCar, and Weeels among others. All these services depend on ratings and reviews to ensure trust among users. Apart from the rating and reviews, most services perform background checks such as checking for criminal records and looking into customers credit histories (Schor 4). Most systems do not automatically confirm a users request to rent something from a provider. This allows the service provider to decide whether to accept or decline the customers offer based on reviews, ratings, and other factors. With reviews and ratings forming an essential component of sharing schemes, it is common for borrowers or providers who have more reviews to be sought after more than those who have less attractive reviews and ratings.
As the sharing services increase in popularity, they have started posing threats to various sectors of the economy. When using these services, questions about legal liability and insurance arise ("The Rise Of The Sharing Economy" par. 9). Also, other services result in providers not adhering to certain industry-specific regulations. For instance, many landlords have complained that their tenants are subletting their properties which violate the landlord-tenant agreements. Also, tax collectors have come out inquiring whether people declare the income that they receive from sharing services. The regulatory uncertainties of the sharing scheme have resulted in heated debates in recent time hence the need to come up with better policies to regulate sharing economy companies.
Despite the popularity, the valuation of sharing economy companies is usually inaccurate due to the entrepreneurs focusing on unnecessary metrics and overhauling some company stocks significantly (Smith par. 6). One of the unnecessary metrics used to valuate sharing economy companies is popularity. Many analysts may value a company at a certain level due to it being popular. However, having tons of users does not necessarily mean that companies are of high value. Rather than considering such metrics, analysts should look at solid business practices by the company to value it at a particular level. Apart from unnecessary metrics, some sharing economy companies may be too speculative with the entrepreneurs being overly optimistic. For instance, in 2014, Uber valued itself at $ 40 billion (Wessel par. 1). However, skeptics of the valuation claimed that the taxi and limousine market could not support such high valuations. Besides, it is hard to justify such valuations when the company does not disclose its profits. If we are not careful, such improper valuations may result in another bubble bust similar to the dot-com boom-bust which may result in huge losses for investors.
There are various online articles that talk about the sharing economy. One such article is What Is The Sharing Economy by Christopher Koopman. The article highlights five ways in which the sharing economy creates value for both providers and customers (Koopman par. 6). First, the sharing scheme creates value by allowing underutilized assets to be put to more productive use. Secondly, the scheme brings together many sellers and buyers hence increasing competitiveness and specialization. Thirdly, the schemes cut down transaction costs as they lower the cost of finding collaborative partners and bargaining over terms. Fourthly, the systems aggregate the reviews and ratings of consumers and make them readily available to new participants hence minimizing the problem of unequal information between service providers and customers. Finally, it makes service providers more efficient and responsive by capturing comments of customers hence resulting in more value creation. The article shows that regardless of what people think about the sharing economy, it has real benefits that create value for both producers and consumers.
The sharing economy has increased in popularity in recent years due to more people using the internet and smartphones. Though such schemes bring a lot of benefits to service providers and customers, they have brought a disruptive force regarding regulatory uncertainty. Many of the companies have at one time have evaded various regulations unfairly showing the need for regulators to come up with better policies to guide the industry. Another issue that comes to mind when dealing with sharing services is that of valuation of the companies. Most valuations of such companies are inaccurate which may lead to another bubble bust just as the dot-com boom-bust if we are not careful. Nonetheless, sharing services companies have an immense potential of transforming various markets. Therefore, all stakeholders should ensure that they adhere to good practices when using sharing services.
Koopman, Christopher. "What Is The Sharing Economy?". Cato Unbound. N.p., 2015. Web. 23 Oct. 2016.
Schor, Juliet B. "The Sharing Economy: Reports from Stage One." (2015).
Smith, Kalen. "History Of The Dot-Com Bubble Burst And How To Avoid Another." Moneycrashers.com. N.p., 2016. Web. 23 Oct. 2016.
"The Rise Of The Sharing Economy." The Economist. N.p., 2013. Web. 23 Oct. 2016.
Wessel, Maxwell. "Making Sense Of UberS $40 Billion Valuation". Harvard Business Review. N.p., 2014. Web. 23 Oct. 2016.
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