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Summary:

Services like Airbnb, Lyft and others that are part of the rapidly-expanding “sharing economy” rely on trust for their peer-to-peer approach to work — but can they maintain that as they become more like traditional businesses?

Examples of what some like to call the “sharing economy” or peer-to-peer economy are all around us. Airbnb has rented rooms, trailers and even castles to 8.5 million people, Lyft is letting 30,000 people every week share their cars, and odd-job services like Taskrabbit are proliferating. Not everyone agrees this is a brand new economic miracle worth celebrating, however: freelance economist Tom Slee, for example — author of the book “No One Makes You Shop at Walmart” — argues that while such services work well on a small scale, as they grow larger they inevitably lose the qualities that made them so successful in the first place.

Virtually all such services, Slee notes in a recent blog post, are based on trust — and that trust in turn is based on some kind of reputation system. For example, a rating system that allows renters to rate their Airbnb hosts (and vice versa), or lets Lyft riders rate their driver. But Slee says these systems are inherently flawed because many users don’t provide an honest rating, either because they are afraid of repercussions or because they have ulterior motives.

BlaBlaCar, for example — a ride-sharing service in Europe — has accumulated millions of ratings, but the vast majority of the 200,000 or so that Slee looked at were five-star. In effect, he argues that this makes the service’s built-in reputation system essentially useless as a trust mechanism:

“With over 98% of ratings being five stars, the reputation system does not meaningfully discriminate among drivers or riders. A reputation system that does not discriminate fails as a reputation system: it fails to solve the problem of trust.”

How do peer-to-peer trust systems scale?

hand shake

A similar problem has been detected at eBay, Slee says: several studies have shown that even though an overwhelming majority of reviews and ratings are positive, the actual level of dissatisfaction is much higher — but users don’t provide accurate ratings because they are afraid of potential retaliation (since many are also eBay sellers themselves). Slee argues that this shows “even in the absence of explicit gaming, peer-to-peer internet reputation systems do not solve the problem of trust.”

As a number of other observers of the sharing economy have also argued, Slee notes that sharing your car or spare room or couch with others is not a brand new activity: all that services such as Airbnb and Lyft or BlaBlaCar provide is a more efficient way of connecting those who want to offer such services with those who require them. As he puts it: “The growth of sharing economy companies is, at least in part, a movement of already-existing social practices to online forums.”

The problem for many such services, however, is that as they grow they attract a number of things that can impede their success, including opportunists and regulatory attention — which Airbnb has been fighting for some time in a number of cities. In order to deal with those problems, Slee argues that they inevitably start to develop systems that make them less community-oriented and much more like traditional businesses, while at the same time trying to avoid regulatory scrutiny:

“To be successful, the venture-capital-funded ‘sharing economy’ will be forced to lose all those aspects of informal sharing that makes ‘sharing’ attractive, and to keep those aspects that erode neighbourhoods, erode employment rights, and remove basic standards.”

The sharing economy and venture capital

Monopoly

This isn’t Slee’s first shot at the peer-to-peer economy and the potential pitfalls it faces: he wrote earlier this year about “Why The Sharing Economy Isn’t” — in which he argued that venture investors are distorting the market — and also wrote recently about how the Omidyar Network’s venture investing is endangering the very commons-based sharing it is trying to encourage through groups like Code For America and Change.org. The bottom line, he says, is that:

“As capital and social action have conflicting goals, using markets to scale up social action can destroy the very thing that made it special in the first place.”

I think some of Slee’s criticisms, or at least his observations and questions, are worth considering. I’ve argued before that services like Airbnb and Coursera and Lyft are disrupting their respective industries in some fundamental ways, and I firmly believe that this is not only good for individual providers who work with those services — who can derive substantial benefits by sharing rooms or cars or their time — but good for the overall economy as well, in the sense that it removes inefficiency and promotes the use of surplus resources.

It’s also true that in many cases the regulatory hurdles that these services run into are designed primarily to protect the incumbents in such markets rather than users, much as critics like Paul Carr — who seems to see Uber in particular as some kind of Ayn Rand-influenced cult — would like to argue otherwise.

That said, however, I think Slee is right that trust and reputation are a crucial element of these services, and arguably the main thing that sets them apart from the more established businesses they are competing with. As they grow larger and have to implement more regulations, or move away from the peer-to-peer aspect of their service for financial or other reasons, will they lose the very thing that made them a compelling alternative to begin with?

This post was updated to note that BlaBlaCar has more than 200,000 ratings — Slee’s conclusions were based on a smaller sample

Post and thumbnail images courtesy of Shutterstock / Sam72 and Flickr user Mark Strozier

  1. Interesting! It seems to me the sharing economy has evolved because it can. Technology has opened traditionally closed service delivery systems. Hotels are no longer the only option. Cabs are no longer the only option. Bikes are more widely available.

    To scale, these new service delivery systems must be economically viable for both the service providers and recipients of the services provided. Price is an important but not the only factor. Convenience, reliability and availability are important factors that influence the ability to scale. Finally, trust, confidence and awareness are key elements as well.

    Regulation comes into play when service is not delivered at the level advertised. Then the consumer must be protected. But that is not always true, given the large number of scams that take money from trusting consumers.

    So, for the sharing economy service providers to scale, they must also rely upon the same factors consumers use to judge traditional businesses, which are trust, reputation, convenience, pricing, safety, availability and reliability.

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  2. public transportation also receives ratings but i’m not influenced any more than i am by advertising in any area, and that is the bottom line here also, right. public opinion only goes so far with all of us, i think it’s known as the proverbial grain of salt. this is just service sector that defines our current economic business situation for those wanting to start a business.
    slayerwulfe

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  3. The sharing economy depends on trust, tech and people willing to share! Yes, sharing is happening because it can, but most importantly because people like to share! We can’t wait to see where it takes us in the future!

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  4. “the regulatory hurdles that these services run into are designed primarily to protect the incumbents in such markets rather than users”

    I’d like to hear your actual argument against that. Tom Slee has pointed out that all across the world, taxis and B&B require licensing, despite that they are mostly small-scale operations and don’t have any sort of effective lobbying cartel. (It would have to be an impressive cartel too, to get protective legislation in every modern country.) If regulation is primarily intended to protect incumbents, how did that come about?

    Let’s take an example. How much do you know about bedbugs? If you start a B&B, you ought to know a bit about bedbugs. I dare say most AirBnB users don’t know a lot about bedbugs.

    Taxis deal a lot with drunk people. There are a lot of risks, both for the customer and the driver. If you’ve run a mid-sized municipality for a few years, you probably have a far greater appreciation of these risks than a fresh car sharer. Sure, the car sharing companies know about these risks by now – but they also have an incentive to downplay them, to not scare away their user base.

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    1. I agree there are some rules that are designed to protect passengers, renters etc. But many of the regulations that don’t apply to safety are designed to protect incumbent providers.

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  5. Econ 101: Competition is good. There is no reason for the “sharing economy” to replace hotels, taxis, etc.

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  6. When I was in college in Mass, I started a car-sharing-esque program due to the lack of good transportation around and off-campus. The solutions were:

    1. DD rides – People would volunteer to taxi other people home. As not to be a business, there was no fee, but you had to have a membership due to use the service. People who volunteered twice in the semester paid nothing and received gas compensation.
    2. Ride-sharing – Message board to group people together to ride home during the weekend.
    3. Car-share – Rent your car to other students for a few bucks a day.

    What eroded the project over time, and what I question with these new services (which I’m proud to see them expanding) is one key factor: liability.

    We were a student organization, so a lot of our stuff had to go through department heads to get okay’d. In the beginning, most people loved the program (although it wasn’t used as much as we like). But as we did get big, we had a lot of overlap with issues of liability and legal hurdles.

    No insurance company would cover us, since we essentially were telling them that N amount of people would be driving X amount of cars at any given time with no standard number, people etc. The school had enforced we couldn’t use residence assistants because they were under school guidelines to write up intoxicated students. And the ridesharing board was scrapped in its 3rd year when officials stated that they didn’t want to be liable for any situation if someone used the board and went missing (all during the Craigslist killer scandal).

    My worry is what happens to either a) the consumer, b) the car-owner, and c) the middle-man company if something bad does happen? I know for personal insurance most won’t cover you if you drive someone else’s car and get into an accident at-fault, and most won’t cover someone else driving your car who doesn’t live in your household or is on your insurance.

    So, let’s say people car-share and use it as a way to do illegal stuff. Or to cause harm somehow to an individual. I think the liability issue would be the biggest hurdle, and I can only imagine that this industry would need some proper regulation to prevent some incident from spurring a lawsuit that can take someone down.

    My point is that the real concern is whether the insurance companies will evolve with this industry or not? One thing I could see as a benefit would be insurance companies to create a subset or separate charge for utilization of a vehicle to be shared, and prop up the same practices that they do when they do comprehensive coverage for older vehicles and inspect them prior to providing coverage.

    I know this is long-winded, but I started a ground-up service and insurance and liability with affiliates were the hugest hurdles in conducting business. I think the real evolution will come in the form of car-sharing in terms of “buying” , where multiple people can own a car or have some partnership alongside a company. That would mitigate a lot of problems this industry is having.

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