Making sense of the Uber economy – 1 – Share? Better talk of a market expansion

Photo François Meunier / President, Alsis Conseil, Associate Professor of Finance, ENSAE ParisTech / September 23rd, 2015

Behind the proliferation of Uber stories hitting the headlines in many countries, the emergence of a sharing economy fascinates, and sometimes worries us, especially because of its blurry boundaries. From the perspective of an economist, it can be described as a market expansion. Exchanges that previously fell within the scope of informal economy are now an integral part of formal economy. It that good news? Yes it is. But this rapid and incomplete transition also raises many problems.

Sharing economy or collaborative economy? Like for all new activities, the choice of a name is still subject to debate, as its boundaries aren’t clearly determined nor its impact on the global economy. Why not Uber-economy, as a hint to its most iconic representative?

New offer, new demand?
If we were to isolate one key event in the development of the Uber economy, it would be the creation of eBay in 1995, soon followed by many imitators such as Leboncoin in France. These are markets for second-hand products where consumers, and an increasing number of professionals, exchange used or new goods. Amazon became the leader of second-hand market of books. At the other end of the spectrum, Meetic organizes the “market” of emotional encounters.

This is the first trait of the Uber economy: contact and pairing. That’s why the term matching economy was coined for this new form of activity, notably by Timothy Taylor in his excellent blog. The website Airbnb uses the more subtle term of “affinity search”. The Internet is a particularly effective tool to organize, beyond the exchange of information, the balance between supply and demand, which is the keystone that can support a secondhand market with a certain level of security concerning quality of products and that of the participants in the exchange.

The Uber economy develops massively in the industries of transport and accommodation: Uber, Airbnb, Booking, as well as fast-growing European companies such as BlaBlaCar. In an excellent study published in EconFocus under the aegis of the Federal Reserve Bank of Richmond, economist Tim Sablik writes that 160,000 drivers are active under the brand Uber in the US, against 230,000 conventional taxis. This type of urban transport nearly doubles conventional transport and clearly, this new offer comes by replacing the old offer but expanding demand. Airbnb is offering over one million homes in 200 countries, as claimed on their website. The Accor Group, the third hotel group in the world, only offers 180,000 rooms, that is to say, 5 times less! The phenomenon is massive, both from the point of view of available supply as from that of demand, for new customers.

Above all, and this is a second feature of the Uber economy, it makes better use of cars, free offices, housing, etc. In short, a better rotation of the equipment or, to speak like an economist, a greater capital productivity. The rate of car use (cars are believed to sleep 95% of their lifecycle in a parking slot) is increasing through carpooling, whether as a commercial service or not, or through rent, with Drivy or Ouicar. And it saves gas: within the same given offer, the Uber economy saves resources, capital goods or intermediaries. That’s why collaborative economy often overlaps circular economy.

Economists are overwhelmingly in favor of these new productive initiatives: they increase the solvent offer and demand – usually through a more effective dissemination of information; they increase competition and reduce prices. Not only by increasing direct competition (Uber vs traditional taxis), but also the indirect one: for example, the SNCF is reducing its prices in response to BlaBlaCar.

The Uber economy changes social practices. Friendly gestures such as sharing and exchange are integrated into the commercial sphere and are subject to commercial trade. Inhibitions concerning the fact of transforming a friendly gesture into a financial product break down, all the more so when the marketplace shows enough marketing intelligence by avoiding any direct payment between individuals: the marketplace handles credit and debit on both accounts, taking a commission for its services. In fact, as pointed by the authors of a remarkable report in a special issue of the journal Esprit (June 2015) devoted to “The sharing economy”, collaborative tools based on the Internet can both stimulate new forms of non-commercial exchanges and of mutual assistance.

But market expansion and the integration of social intermediation in a market mechanism raises also many issues: more anonymity, self-help values supplanted by personal interest, the development of services to individuals beyond what philanthropy allows. It is probably regrettable that BlaBlaCar introduced a monetary aspect into carpooling. But today, who is still willing to pick up a hitchhiker on the side of the road, like people did forty years ago? The mediation of the market requires a supplement of social trust.

Social trust, privacy and ratings
One can only be surprised at the ease with which apartment exchanges, whether commercial or not, have developed when you think they actually imply leaving the keys to your house to a perfect stranger. Or that second-hand markets such as Leboncoin have emerged, when there are no means of checking the conformity of the object we are buying beforehand. This is the issue at stake with the arrival of a new market: the possible crowding out of codes and values that previously enabled trade, but an extra amount of trust that makes the transaction possible.

The other major feature that explains this extra amount of trust is cross-rating. Rating was well established in the business world, with specialized agents (rating agencies, banks, audit office, auditors…) that use their external authority to assess financial health, certify industrial processes and product compliance. Here, rating is provided on a peer-to-peer basis. Students have been graded for ages, but teachers are graded too, at least in tertiary education. In companies, rating exercises by subordinates are proliferating. 360-degree feedback includes peers and line management.

Some countries are more advanced than others in this movement. In the US, banks have been using credit ratings for their customers or prospects since a long time: negative ratings indicate a credit accident (also used in other areas), but positive ratings indicate the ability to honor a credit. We could see the emergence of rating aggregators, which would be able to search for scores on all the sites we visit and use: are you reliable, a good consumer, producer, employer, worker, student, spouse… This will be useful to getting hired, finding accommodation, borrowing money, getting married…

Marc Andreessen, a famous investor in Silicon Valley, sees this source of data as a paradigm shift in the financial industry. In a 2014 interview with Business Week, he said: “There is a growing idea in Silicon Valley that there are sources of data on consumer behavior we can use to predict creditworthiness (…): credit card bills, social-network behavior, potentially even search on the history of that person. Lots of people, both in the big Internet companies and at startups, are trying to get at these large pools of data and figure out new ways to do scoring. What they all have in common is that they are all being done outside of banks. ” And he adds: “The minute any of these new credit vehicles can show any level of repeatability and reliability, the hedge funds come in and provide the funding. Hedge funds are very comfortable with analytic models. If you have sufficient stability, you can get leverage.”

Beyond the issue of privacy protection, this evolution has an impact on social life. There is nothing really new in the principle. I give you information, you give me another and we build a trusted relationship… if we accept to base trust on each other’s predictability rather than moral behavior. Politeness rules have gradually built on this basis: I shall observe a few rules of deference to create a similar attitude in others; these rules were created and selected empirically over time for their creative virtues in building trust. There is one disciplinary element in the process: if I comply with a good attitude, the other will appreciate and my reputation, the confidence I instill, will be greatly increased. The collective balance of the game is, in principle, a set of behaviors that are more stabilizing, both economically and socially. But its generalization poses with renewed intensity the classic dilemma. On one hand, the cross-rating process is often able to better provide the right information than an external expert; and, knowing that it is a collective work, it also requires more discipline. On the other, the community is the public opinion, which is prone to emotions, rash considerations, rejections, rumors… The other’s opinion forces to discipline. But, when widespread, it can also be mutilating.

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