Rise of the Peer-to-Peer Economy Improves Life for Everyone

Jesse  Hathaway
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Posted: Oct 26, 2015 12:35 PM
Rise of the Peer-to-Peer Economy Improves Life for Everyone

A new kind of business model connecting customers and providers is cutting out inefficient middlemen and reducing costs. Unfortunately, some governments are trying to undercut these new services at the request of the old-economy companies that are displacing them with their greater efficiency.

Called the “peer-to-peer economy” by economists, this new model directly connects consumers and service providers who are owner-operators of their services, not just employees of a big company. By making that connection between users and a much wider range of providers, everyone wins; the consumer benefits from the use of someone else’s capital good, and the provider receives money for the use of property that would otherwise go unused.

For example, someone seeking to travel to a bar that’s too far away to walk needs transportation. The consumer hails a driver through a convenient phone app, such as the ones offered by Uber and Lyft, because the value of being transported to (and especially from) the bar is greater than the cost he or she will be charged. The driver answering on the rideshare service’s smartphone app has some free time and a car that’s not being used at the moment. The transaction concludes, and both parties benefit from the deal.

The benefits of rideshare services aren’t found exclusively on the microeconomic scale. Rideshare services have an empirically proven positive effect on neighborhoods the government-sanctioned taxicab monopoly has neglected.

Studying a full year’s worth of micro-geographic metadata from Uber trips in New York City and surrounding neighborhoods, Manhattan Institute researcher Jared Meyer discovered Uber’s most enthusiastic growth came not from business travelers going from downtown to the airport, but in the city’s poorer and more ethnically diverse neighborhoods.

In other words, Uber’s entry into the city’s for-hire transportation market empowered consumers in underserved markets to go about their business and engage in more economic activity than they might otherwise have done.

Helping people get where they’re going, in a city whose government-sanctioned taxi industry is well-known for red-lining and discrimination, is undeniably a good thing.

Another benefit of the peer-to-peer economy is the resurrection of what economists call “dead capital.” Dead capital is capital owners are unable to leverage and consumers are unable to benefit from because of regulatory barriers or other constraints.

Bedrooms are a great example of dead capital. As Mercatus Center at George Mason University Executive Director Daniel Rothschild points out, there are about 1.5 bedrooms for every man, woman, and child in the country, meaning there are literally more bedrooms than people in the United States.

“This represents a great deal of capital that people own but aren’t leveraging to earn returns,” Rothschild wrote.

Peer-to-peer companies such as Airbnb not only help consumers using the service, but also have a significant effect on all consumers in the market as a whole.

In his study of the effect of Airbnb’s entry into the hospitality market, Boston University assistant professor Georgios Zervas examined monthly hotel revenue data from about 4,000 Texas hotels dating back to 2003. Zervas found Airbnb actually causes hotel rooms to become less expensive, because “a hotel that exerts no response to a supply shock would exhibit a reduction in occupancy, whereas alternatively, a manager could maintain occupancy levels via a price response.” As a result, he writes, “Reduced prices, is a net benefit for all consumers, whether they use Airbnb or not.”

Empowering consumers, cutting out middleman and directly connecting buyers with sellers, and reducing consumers’ costs across the board are all good things. Lawmakers should allow people to benefit from the peer-to-peer economy’s rising tide, instead of trying to hold back the wave of the future.