The Sharing Economy is commonly referred to as collaborative consumption – the core of which is people renting things from each other. The Sharing Economy’s value is driven by the role of technology in driving down transaction costs to facilitate peer-to-peer transactions.
But, not unlike everything else on the internet, is it possible that we are getting a little carried away with trying to fit everything into this growing marketplace? Is it possible that many of the “sharing economy” companies are using the label without focusing on the sharing? Without caring, the sharing economy can lose its value to society.
Let’s take a really simple example. Assume there is a town with 100 taxi drivers each making $50,000 per year. Now, a ride sharing company, call it Goober, comes to town with a “sharing economy” app. Goober drives prices down 20% for consumers, decreasing the total transportation market from $5 million to $4 million. Instead of 100 drivers, they employ 200 drivers. Better prices for consumers, and more people working. But…
A basic principle of economic theory is that supply and demand are at the root of every transaction. Despite the complexities and exceptions, we generally accept the relationship between supply and demand. Demand is based on the observation that the lower the price of a product, the more people will want to buy that product. Supply is based on the observation that the higher the price of a product, the more of it producers will supply. At a particular price, the economy should achieve a natural equilibrium.
The simplicity of supply and demand basics is exquisite. But, before we can understand the operation of such a simple concept, we have to understand the meaning of product and of price. Our world is complex. Each situation is unique, so lets start with a social media platform, such as Facebook.
One possibility is that Facebook is the producer. Facebook’s product is the software that is the social media platform. The consumers are the users of the platform. Then, the price of the product is $0. If Facebook were to raise the price to $10 for the platform, the basics of supply and demand would suggest that people would not demand as much of the product. Similarly, if the price of the product decreased from $0 to -$20, the users would be paid $20 for using Facebook. Then, the demand for the product should increase.