Study examines effects of the ‘sharing economy’ revolution

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A recent study by published by the Mercatus Center at George Mason University examines the recent rise of innovative peer-to-peer companies such as Airbnb, Lyft, and Uber, explaining the “sharing economy” and its relationship with consumers and regulators.

Mercatus Center scholars Christopher Koopman, Matthew Mitchell, and Adam Thierer define the sharing economy as “any marketplace that brings together distributed networks of individuals to share or exchange otherwise underutilized goods—for both monetary and non-monetary benefit.”

Examples of companies in the sharing economy include familiar examples like Airbnb, Lyft, or Uber. By “underutilized assets or ‘dead capital’ to be put to more productive use,” the authors explain, the sharing economy improves “consumer welfare by offering new innovations, more choices, more service differentiation, better prices, and higher-quality services.”

Outmoded and Redundant Regulations

However, difficulties encountered by sharing-economy companies include the application of “older regulatory regimes on these new services without much thought about whether they
are still necessary to protect consumer welfare.”

The authors explain how the sharing economy’s nature often renders consumer protection regulations irrelevant or redundant.

“Under the traditional ‘public interest theory’ of regulation, regulation is sought to protect consumers from externalities, inadequate competition, price gouging, asymmetric information, unequal bargaining power, and a host of other perceived ‘market failures,’” they write.

When attempting to craft regulations on this new kind of economic activity, regulators ignore the dynamic nature of market forces, adjusting “behaviors and practices in order to correct imperfections, reduce frictions, and solve the problems of coordination that many others tend to identify as ‘failures.’”

Consumer Power

Another method through which technology enables consumer power is the establishment of “reputational feedback mechanisms,” such as product rating and review websites. Citing Uber’s smartphone app as an example, the study explains how consumers’ ability to independently verify the efficiency of their driver’s route allows consumers to avoid being scammed.

For drivers, on the other hand, riders’ identifying information is logged during the transaction, reducing the incentive for theft of cash or property during the ride and increasing the drivers’ safety.

“The sharing economy means we’re using our resources more intensely,” Johnson and Wales University assistant professor Adam C. Smith explained. “We’re using our resources more intensely than we ever have, because we have these transaction cost-reducing technologies, like smartphone apps and so forth. All of that can only come through a decentralized network of people—consumers and producers—coming together.

“You wouldn’t normally think, ‘oh, what am I going to do with my car if I’m not using it,’ or ‘what am I going to do with my apartment or my kitchen… Well, it turns out that, now, we can communicate and transact with one another, allowing us to use those otherwise dormant resources,” he added.

Another method through which the sharing economy empowers consumers, is its self-regulating nature.

“Modern online feedback mechanisms have made it easier for honesty to be enforced through strong reputational incentives,” the authors explain. “Competitive firms are often quicker than regulators to point out the substandard service of their rivals. The result is reasonably well-functioning, self-regulating markets with strong checks on improper behavior.

In the sharing economy, the authors conclude, “bad actors get weeded out fairly quickly through better information, reputational incentives, and aggressive community self-policing.”

New Challenges and Opportunities

According to Smith, the new sharing economy presents both challenges and opportunities.

“We need to think of these new technologies—as with any new technology—as creative destruction and disruptive. That’s both good and bad. It’s good, in the sense that it’s disruptive because it’s more useful—which is a great thing,” he said. “It will be bad for some people, as it will displace certain jobs and certain labor. From a macro perspective, from a long-term perspective, there is no doubt that creative destruction and disruption are necessary functions in a wealth-generating economy.”

Raising regulatory hurdles to slow the rise of the new economy, the study’s authors say, hurts consumers more than it helps.

“The net effect of regulations that limit entry and homogenize price and quality is to insulate incumbent firms from dynamic competition that would otherwise benefit consumers,” the authors write. “In particular, if firms are insulated from competition from new entrants, they can obtain some measure of monopoly or pricing power. This diminishes consumer welfare while enhancing producer profit.”

Smith agreed with the study’s conclusion, adding “it’s not a matter of ‘should we or should we not regulate,’ it’s that we need to frame the argument correctly and recognize it’s an integral part of the marketplace.

“Regulations need to deal with that accordingly, rather than thinking of this as some kind of abnormal aspect of the marketplace that needs to be stomped out,” he said.”

Smith compared the sharing economy’s “creative destruction” to the ecological role played by a forest fire.

“‘Forest fires are bad, we all know forest fires are bad,’ that’s what Smokey the Bear tells us, right? Actually, forest fires are a necessary part of increasing the longevity and health of a forest. Fire pares back overgrowth; it’s how the forest naturally regulates itself.”

Alexander Anton ( writes from Palatine, Illinois.