Defining the Peer-to-Peer Economy

Description of the Peer-to-Peer Platform Game

Major Issues Surrounding the P2P Platform Game

Winners and Losers in the P2P Platform Game

The “sharing economy” is one of the hottest, new tech paradigms. How hot is it? I just Googled “sharing economy paradigm” and got 6,590,000 hits. Pretty hot.

In particular, Airbnb, Uber, and Lyft have been all over the media for challenging established regulations and driving traditional businesses into a tizzy for threatening their livelihoods.

Is the sharing economy really a new paradigm? Is it here to stay? If so, how will it impact the traditional economy? Who will be the winners and losers under the new paradigm?

Defining the Peer-to-Peer Economy

Wikipedia defines the “Sharing Economy” as follows:

The Sharing Economy (sometimes also referred to as the peer-to-peer economy, mesh, collaborative economy, collaborative consumption) is a socio-economic system built around the sharing of human and physical assets. It includes the shared creation, production, distribution, trade and consumption of goods and services by different people and organizations. These systems take a variety of forms, often leveraging information technology to empower individuals, corporations, non-profits and government with information that enables distribution, sharing and reuse of excess capacity in goods and services. A common premise is that when information about goods is shared, the value of those goods may increase, for the business, for individuals, and for the community.

The “Sharing Economy” is a bit of a misnomer, since many (most?) of the transactions that take place between group participants involve transfers of money from users to providers. A recent article in Time, “Can We Stop Pretending the Sharing Economy Is All About Sharing?” provided a very apt description of this very point:

The “sharing economy” is the all-purpose term used to describe transactions in which someone in possession of a car, or home, or self-storage space, or commercial real estate, or almost anything else imaginable “shares” it with a stranger. But is “sharing” the right word? Sharing is something people generally do out of the goodness of their hearts, and in pretty much all sharing economy scenarios, some money is changing hands… The other popular term for this world, “peer-to-peer” business, seems more accurate, though also more cold-hearted…

There are, indeed, participants in the Sharing Economy who do actually share resources, as opposed to rent, buy, or sell them. The top panel in Figure 1 provides some examples. However, the more contentious members of the Sharing Economy are those in which users pay money to providers in exchange for some product or service. The bottom panel in Figure 1 provides some examples of these latter systems. And It is this latter group — to which I will refer as the “Peer-to-Peer Economy” (P2P Economy) or “Peer-to-Peer Systems” (P2P Systems) — on which the rest of this analysis focuses. To iterate, from now on, when I refer to members of the P2P Economy I mean those platforms and/or their associated transactions that involve transfers of money from user/buyer to provider.

Figure 1

Description of the Peer-to-Peer Platform Game

The dynamics of the battle between Traditional Providers and members of the P2P Economy constitute a game: the players in the game are Traditional Providers, Regulators, P2P Platforms, P2P Providers, and P2P Users. Each player’s payoff (profits) is affected by the actions taken by the other players. The P2P Platform Game is illustrated in Figure 2.

Figure 2

Let’s consider the incentives faced by each player.

Traditional Providers

Traditional Providers are the established providers of the same types of products or services offered through the new P2P Platforms. Examples include cab drivers, hotels, car rental agencies, and restaurants. The established providers are generally in the market with the goal of maximizing profits. They are subject to the rules and regulations that have been imposed by Regulators. At the same time, however, many Traditional Providers have lobbied Regulators to impose rules or regulations that are favorable to the Traditional Providers , at the expense of other actual or potential (e.g., P2P) Providers (and Users). Such lobbied-for regulations may include, for example, limits on entry or capacity, minimum prices, or special licensing or certification requirements. Notably, Traditional Providers have often invested in capital goods (e.g., automobiles, hotels, branding) that enable them to provide their products or services to Users, and they must earn back the costs of these investments before they’re able to generate a profit.

Regulators

Regulators include any government agencies that are empowered to impose rules and restrictions on Providers. Regulators include, for example, OSHA, the Health Department, and the IRS. The aims of Regulators are generally threefold: (i) to ensure Providers meet minimum standards for safety and quality, (ii) to ensure Providers pay requisite dues, fees, and taxes to local and federal governments, and (iii) to satisfy their constituents (special interests).

P2P Platforms

P2P Platforms are newer entrants into the marketplace that provide infrastructure enabling individual buyers and sellers of products and services to find each and engage in transactions. The more successful P2P Platforms offer services to their Users (both buyers and sellers) that facilitate transactions, such as providing payment systems, providing rating systems for Users and Providers involved in transactions, vetting Users and Providers to weed out undesirables, and assuming liability for any problems encountered by platform Users (buyers and sellers alike). P2P Platforms mainly generate revenues by taking a cut of money transferred from buyer to seller. Of course, P2P Platforms may also generate revenues from ads. The ultimate goal of the P2P Platforms involved with money transactions is, for the most part, to maximize/monetize the value of their platforms. However, many of the platform companies (in particular, those that don’t generate revenues from ads) haven’t yet figured out how to extract profits. So in the meantime, P2P Platforms generally focus on maximizing the number and/or value of transactions that take place between P2P Users and P2P Providers of goods and services that utilize their platform.

P2P Providers

P2P Providers are individuals who have excess capacity of some sort — bed or house time to spare, car time to spare, extra time for cooking or doing other tasks — and are willing to rent out their excess capacity to other individuals. While P2P Providers are interested in earning money, their primary concerns seem to be (i) flexibility, that is, being able to rent out their excess capacity at their convenience, and (ii) a desire for a sense of community. In addition to not being primarily driven by profit, as are most Traditional Providers, P2P Providers also have another advantage over traditional providers in that they don’t have to earn back their costs of capital to generate a profit. Rather, any money they earn from their participation in platform transactions appears, for the most part, to be pure gravy. (There is, in fact, a segment of P2P Providers who are really full-time profit maximizers, but these are really Traditional Providers trying to mask themselves as P2P Providers.)

P2P Users

P2P Users are individuals who are interested in buying or renting products or services. P2P Users are interested in paying low prices for the products or services they’re looking for. While they are interested in minimum standards for quality and safety, they seem to be more flexible in their needs and more desirous of a sense of community and adventure than more Traditional Users.

Major Issues Surrounding the P2P Platform Game

Rules and Regulations

The biggest complaint about Peer-to-Peer Platforms and Providers comes from Traditional Providers, who lament that the new entrants aren’t following their respective industry’s rules and regulations. In particular, Traditional Providers claim that many of the P2P Providers are operating as unlicensed providers (cabbies, hotels, restaurants, etc.).

Some of the rules and regulations at issue are for user protection purposes. That is, they are intended to ensure that Providers are meeting minimum standards for health (e.g., food providers have health permits), safety (e.g., drivers pass background checks, automobiles are inspected regularly, hotels have emergency exits), and quality (e.g., providers have met minimum licensing or certification requirements). In these instances, I predict that the P2P Providers will eventually be forced to meet these same (or similar) requirements. And in fact, many of the P2P Platforms already vet their Providers to ensure the products and services provided do, in fact, meet minimum requirements. For example, according to Jess Bolluyt in “Lyft Is the Latest Sharing Economy Startup to Face Resistance,”

New York Lyft drivers have gone through a screening process, which the company claim “is more stringent than what’s required for NYC taxis, including a strict background check, vehicle inspection, and $1,000,000 insurance that provides more than three times the $300,000 minimum for taxis.”…

In other cases, the rules or regulations have been established, oftentimes through lobbying by Traditional Providers, to protect the interests of the Traditional Providers. In particular, restrictions on new entry into the market (as with the NYC taxi medallions) and many price floors, are often anti-competitive and end up inflating prices for Users. The City (NYC) and the taxi drivers might claim that restrictions reduce congestion or mitigate other problems, such as pollution. However, many such rules and regulations are essentially protectionist measures. Michael Beckerman, President and CEO of the Internet Association, a D.C.-based lobbying group devoted to Internet freedom sums it up when he says,

... I think [sharing economy companies] have tried to comply with the law where they can, but at the end of the day, the other side isn’t really playing fair … They’re trying to keep out competition.

As further support for this point, Kim Lyons in “The Share Economy Is Here to Stay” notes

Duquesne University economist Matt Ryan said the strongly supportive local reaction to Lyft and Uber has surprised him. "The only people fighting against them are those trying to protect the regulated industries."…

In these cases where the rules and regulations are anti-competitive, I predict the new P2P Platforms and Providers will eventually prevail. And some of them are taking interesting approaches to do just that. Marcus Wohlsen, in “Uber’s Brilliant Strategy to Make Itself Too Big to Ban” states

Uber wants to grow as quickly as it can, and right now, it’s chasing that goal by undercutting the competition on price—even if it loses money in the process. This isn’t a novel approach among tech startups, for which profits aren’t valued nearly as much as popularity. But for Uber, playing in the new realm of the so-called sharing economy, the stakes are higher, since so many entrenched interests are trying to regulate it out of existence. With not just success but survival on the line, Uber has even more incentive to expand as rapidly as possible. If it gets big enough quickly enough, the political price could become too high for any elected official who tries to pull Uber to the curb…

By drastically lowering its prices, Uber is doing more than increasing its customer base. It’s cultivating constituents — the people who will complain when someone in power tries to take away their Uber.

What will be a bit more tricky to overcome are rules and regulations that involve externalities, such as laws meant to minimize harm (safety violations, noise pollution, etc.) to residents located near P2P Providers. In “A Warning for Hosts of Airbnb Travelers,” Ron Lieber notes

Even if your guests are considerate … that won’t protect you. Nosy neighbors are everywhere, and if they don’t like you or your music or your dog or the smells of your cooking, they will not hesitate to anonymously report you to the proper authorities the moment they spot strangers in or near your home.

In the end, there will probably be restrictions placed on where, when, and how particular P2P Providers are able to operate, and hopefully some of the more anti-competitive restrictions will be lifted. As “Boom and Backlash” notes,

Even where companies and regulators have been in conflict, there are signs of peace breaking out… Corey Owens, head of public policy at Uber, says that in his industry local authorities can be put into three “buckets”. In the first are those with strict rules that they intend to keep... In the second are places where the future is ambiguous... Authorities in the third bucket have recognised that the world is changing... The trend, Mr Owens thinks, is for regulators to shift from the second bucket to the third…

Trust

The biggest challenge facing P2P Platforms is gaining Users’ trust.

In an attempt to gain Users’ trust and to weed out both undesirable Users and Providers, the P2P Platforms have been using rating systems. In “Inside Uber’s Political War Machine,” Olivia Nuzzi provides some details on Uber’s rating system:

…Drivers and passengers alike are given mandatory star ratings, on a scale of 1-5, after each ride. If a driver’s average rating falls too low (below 4.5), they can be kicked off the app without notice. If a passenger’s does the same, they could risk being skipped over for rides by drivers... This system is meant to self-regulate by weeding out the bad eggs…

Airbnb has instituted a more complex system of algorithms to address the trust issue. In a fascinating article “How Airbnb and Lyft Finally Got Americans to Trust Each Other,” Jason Tanz describes how the algorithms work.

We are entrusting complete strangers with our most valuable possessions, our personal experiences—and our very lives. In the process, we are entering a new era of Internet-enabled intimacy. This is not just an economic breakthrough. It is a cultural one, enabled by a sophisticated series of mechanisms, algorithms, and finely calibrated systems of rewards and punishments…

… Airbnb … cofounders … imagined the service as a kind of event­specific craigslist, pairing renters with hosts and then leaving them to their own devices. But over the years, the company broadened its scope and took on a larger and larger role—handling all of the payments, hosting reviews, hiring professional photographers to shoot properties, and providing a platform for hosts and guests to communicate with one another.

Airbnb’s analytics system takes factors like these into account, then assigns each reservation a “trust score.” If the score is too low, it’s automatically flagged for further investigation… In a lot of ways, this process is similar to the trust infrastructure that eBay developed—a machine that assumes risk on behalf of its customers and frees them from the responsibility of assessing each other’s trustworthiness.

In the end, however, what the success or failure of P2P Platforms will all distill down to is issues of liability. In “The Sharing Economy Boom Is About to Bust.” Joe Mathews notes how extremely complex the issue of liability is as it relates to P2P Platform businesses:

The best adjective to describe this kind of movement is totalitarian. As the Czech novelist Milan Kundera put it, “Totalitarianism is not only hell, but also the dream of paradise.” So my bid to watch your dog while you’re on vacation—and yours to drive me to the airport—is at once freeing and full of dangers. Who’s responsible if your dog bites my kid while in my care? What kind of car insurance, training and licensing do you need to shuttle me safely? What, if anything, do we owe to the kennel workers and cabbies who lose work? And who decides how we govern all of this?

There are so many potential conflicts—along professional, political, commercial, geographic, generational and gender lines...

Liability is addressed by having insurance. So then what it all really boils down to is insurance. In his insightful artful, “What Makes or Breaks Startups in the Sharing Economy? Insurance Rates,” Jason Tanz pithily states

Insurance represents both the lifeblood and the biggest threat to the sharing economy.

The problem is that it is extremely expensive for a new company (P2P Platforms) with no track record to insure (tens or even hundreds of) thousands of P2P Providers. Minimizing insurance premiums by doing everything possible to weed out bad Providers becomes not just good business practice, but the only way to survive. Jason Tanz details Lyft’s and RelayRides’ approaches to dealing with this insurance problem:

…[O]ffering $1 million in insurance to every one of your customers can be a brutally expensive affair — especially when you’re building an entirely new business model without a track record that underwriters can use to calculate how much they’ll charge.

Scott Weiss, a partner at Andreessen Horowitz who led the firm’s investment in Lyft, told me that the ride-sharing company is overpaying for insurance today — though he expects those rates to come down over time. “They’re going to get the claims data that will show the insurance companies: ‘Oh, these are really good drivers, they’re not having accidents,’” he says. “But because it’s new, it takes a while for that data to spit out. So, in the interim, they’ll have to pay more speculative rates.”

That puts companies in the position of doing everything within their power to ensure that their members treat one another well — not only for their customers’ sake, but to minimize payouts and convince insurers to lower their rates. RelayRides’ Haddad says that his underwriters calculate premiums by looking at the previous year’s payouts and adding a 25 percent margin. “So everything we do to protect our marketplace from bad drivers — to make sure that as close to 100 percent as possible of transactions run completely smoothly — lowers our payouts and our premiums.” To that end, RelayRides has instituted mechanisms to weed out unsafe drivers — including getting realtime DMV data to screen potential renters, at an average cost of $13 per driver. (The fee varies widely by state). As a result, Haddad says, between 15 and 20 percent of RelayRides applicants get turned down.

“That creates friction, obviously,” Haddad says. “Sometimes we lose legitimate people that way. But at this point we’ve taken the approach of being a bit on the harsh side to lower our insurance premiums, which otherwise would have killed the business.”

In the end, the P2P Platforms that survive may very well be those who have developed the best systems for minimizing insurance payouts, both to P2P Users and to P2P Providers. This will be done by efficiently weeding out those customers with the greatest potential for causing liability problems for the Platforms. Given all the potential complexities, as noted in the Joe Mathews quote above, a good deal of time, money, and resources, will be spent by both private (those of the P2P Platforms ) and public (those of governments and courts) entities to resolve all the liability issues. If one can somehow invest in the court systems that will be handling these issues, now would be a good time to put your money down.

Efficiency

Several years ago when the P2P Economy was in a more nascent stage, I posted a blog entry, Sharing Economy Systems, which analyzed the economics of peer-to-peer product systems. In that blog post I discussed three main issues: (i) The Buy vs. Rent Decision, (ii) Actual vs. Potential Value of Durable Products, and (iii) Characterization of Potentially Collaborative Products. Two key conclusions I came to in that analysis were

So with multiple-user durable products, users with low hourly benefits/value or less total usage have a better chance of being able to use the products.

and

What this means is that shifting from a one bike, one user system to a bicycle sharing program [or any other product sharing program] in which multiple low-intensity users share each bicycle creates much more value for everyone.

Both of these conclusions are not only still valid with the current crop of P2P Platforms, Users, and Providers, but they also remain the key advantages of the current system. In this section I discuss the economics of P2P Systems from a slightly different perspective from that in my previous post, and, as I just mentioned, I come to the same conclusions as I did in my earlier post.  

The efficiency effects associated with P2P Systems may be divided into first order, or direct, effects and second order, or indirect effects. I discuss each of these types of effects in turn.

First Order Effects

The obvious benefit of P2P Systems is that they enable a more efficient use of resources. There is less duplication of fixed costs, less use of scarce resources, greater intensity of use of existing durable products, and less excess capacity in a P2P System. In the language of my previous post, the actual use and value of durable products comes closer to their potential use and value than they do under more Traditional Systems. More succinctly, P2P Systems are more sustainable than Traditional Systems.

Let’s make a left turn for a moment. In “‘All Hail the "Sharing Economy!’ A Mushy Phrase Gives Liberals Cover to Join the Fight Against Big Government,”Jim Epstein asks an extremely insightful question:

Is the sharing economy a new paradigm for American capitalism?

It's true that sharing economy firms like Lyft, Airbnb, Getaround, and EatWith couldn't have existed a decade ago. By reducing transaction costs, the Internet has indeed made it feasible for individuals to sell many goods and services directly to one another. But Ebay, which launched 19 years ago, epitomizes this model and isn't generally considered part of the sharing economy… why is paying a neighbor to borrow a drill through the website Snapgoods better than renting the same drill from a hardware store? If a real estate company advertises an apartment through Airbnb is that any worse than if a tenant of the same real estate company is the one advertising the apartment? For many of these industries, peer-to-peer is nothing new. TaskRabbit is a great way to hire a handyman, but the home repair industry has always been comprised primarily of independent contractors. The taxi business has been dominated by drivers working for themselves going back to its early days in Victorian London.

So what’s different now? How has the market changed?

What’s changed is the distinction between a business providing a product or service and an individual with excess capacity providing the same product or service (in his spare time).

When it’s a business, all capital expenses (automobiles, hotel furnishings, power tools, restaurant equipment, etc.) must be recovered before the business can generate a profit. As such, for a business to survive, it must charge customers a price that includes not only the marginal costs incurred to serve particular customers, but also a portion of the fixed costs associated with any capital expenditures that were required to enable the business to provide the products or services. More technically, price must exceed average cost.

In contrast, an individual offering up excess capacity does not have to cover any capital costs associated with providing the products or services. Those capital costs are recovered by the individual through the value he obtains from using the capital goods on his own time, serving his own needs. When the individual offers up excess capacity in the P2P System, all he needs to cover are his marginal costs associated with serving particular P2P Users. So for P2P Providers price must exceed marginal cost.

What this means is that P2P Providers have a natural cost advantage over Traditional Providers. As long as these capital costs that Traditional Providers must recover are greater than the cut the P2P Platform takes from P2P Providers, the prices P2P Providers are able to charge customers will be less than those charged by Traditional Providers.

At the same time, the P2P Platforms further reduce transactions costs relative to those in the Traditional Economy by enabling buyers and sellers to easily find each other (through the platform) and easily transact (through Platform payment systems). In “With Uber, Less Reason to Own a Car,” Farhad Manjoo makes these same points in a less abstract manner:

But Uber has done more than increase the supply of cars in the taxi market. Thanks to technology, it has also improved their utility and efficiency. By monitoring ridership, Uber can smartly allocate cars in places of high demand, and by connecting with users’ phones, it has automated the paying process. When you’re done with an Uber ride, you just leave the car; there’s no fiddling with a credit card and no tipping. Even better, there’s no parking.

By reducing costs in the P2P System through (i) the elimination of capital recovery costs, and (ii) the reduction of transaction costs, the P2P System enables P2P Providers to charge much lower prices to Users than under the Traditional System. Traditional Providers are also currently subject to (some) regulatory costs that P2P Providers don’t have to fully bear. This gives the P2P Providers another cost advantage. However, I predict this will only be temporary, until the Regulators figure out how to extract rents from P2P Providers.

Back to the first order effects. The much lower prices enabled in the P2P System will open up the market to a whole new group of Users who were not previously participating in these markets because their values of the products and services were less than the prices being charged by Traditional Providers. At the same time, by using up excess capacity, P2P Users help P2P Providers extract more value from their capital goods, thereby creating extra value for P2P Providers.

With more Users in the market and greater value accumulating to Providers, the social surplus must necessarily be greater in the P2P Economy than it is in the Traditional Economy, right? Well, what about the fact that Traditional Providers will be worse off because their business is being stolen by P2P Providers who are able to undercut their prices to existing Users? The first order effect is, at worst, a wash, because the social surplus that Traditional Providers lose on existing Users is gained by the P2P Providers that now get the business. The second order effect is discussed below.

Second Order Effects

The second order effects of P2P Systems are the indirect effects that occur as a consequence of the direct effects.

The lower costs, coupled with increased convenience, of inter-city transportation offered by the P2P ridesharing programs will dramatically lower both the private and social costs of living in cities. As a result, they may very well end up changing cities’ entire transportation landscape. Farhad Manjoo describes this phenomenon in more detail:

… Uber … could well transform transportation … ultimately making many modes of urban transportation cheaper, more flexible and more widely accessible to people across the income spectrum.

Uber could pull this off by accomplishing something that has long been seen as a pipe dream among transportation scholars: It has the potential to decrease private car ownership...

Now that Uber, Lyft and other rivals are embroiled in a vicious match for dominance across the globe, ride-sharing prices over all are sure to plummet. The competition is likely to result in more areas of the country in which ride-sharing becomes both cheaper and more convenient than owning a car, a shift that could profoundly alter how people navigate American cities.

Over the next few years, if Uber and other such services do reduce the need for private vehicle ownership, they could help lower the cost of living in urban areas, reduce the environmental toll exacted by privately owned automobiles (like the emissions we spew while cruising for parking), and reallocate space now being wasted on parking lots to more valuable uses, like housing.

Paradoxically, some experts say, the increased use of ride-sharing services could also spawn renewed interest in and funding for public transportation, because people generally use taxis in conjunction with many other forms of transportation.

Jim Epstein astutely notes that while society may benefit from the changing landscape caused by the P2P Economy, it may ultimately end up being worse off, through the Jevons paradox.

Sure, it's possible those empty hotels driven out of business by Airbnb would be torn down to make way for, say, a nature reserve. What Allen doesn't mention is that they might also be repurposed to satisfy other human desires that require just as much if not more electricity. It's a phenomenon called the Jevons paradox, named after the nineteenth-century British economist William Jevons, who observed that as steam engines became more efficient demand for coal actually grew...

It could happen, for example, that the cost of living in cities is reduced so dramatically that it attracts a whole new wave of relocation from outside areas into cities. This could end up making cities even more congested than they originally were in the Traditional Economy.

Jim Epstein also notes the fact of repositioning of resources driven out of business by the P2P Economy. This goes back to the issue of social surplus associated with Traditional Providers losing business to P2P Providers mentioned at the end of the previous section. I indicated that the first order effect is, at worst, a wash. At worst, Traditional Providers lose business to P2P Providers on the margin, but still remain in business. If however, P2P Providers end up putting Traditional Providers out of business, then the resources associated with failed Traditional Providers can be repurposed towards other activities. In this case, social surplus increases because P2P Providers will be providing services more efficiently than the Traditional Providers did, and the Traditional Providers can then use their resources for some other productive means. Theoretically. Of course, the Traditional Providers who are driven out of business could also end up remaining unemployed and unproductive, drawing resources from society. But economist don’t talk about those bad things, right?

Winners and Losers in the P2P Platform Game

Now that I have described the P2P Platform Game, discussed the incentives and wants of each of the major player groups, and discussed the major issues surrounding the P2P Platform Game, I am ready to analyze the winners and losers of the P2P Platform Game.

Traditional Providers

Traditional Providers end up losing the most in the P2P Platform Game. Their technology is fast becoming obsolete, so-to-speak, and they stand to lose money and jobs.

Traditional Providers face a three-pronged cost disadvantage relative to P2P Providers: (i) they have to recover their costs of capital, (ii) they incur higher transaction costs associated with their current/traditional business operations, and (iii) they face regulatory costs that the newer economy entrants don’t (yet) have to bear. Over time, any differences in regulatory costs incurred by Traditional vs. P2P Providers will probably dissipate, as either the regulations will be revoked (in the case of purely anti-competitive regulations) or the P2P Providers will eventually be subject to the same or similar regulations (in the case of regulations that protect consumers)

In the short run, faced with the new competition, Traditional Providers will end up catering mostly to later adopters of new (P2P) technologies (i.e., people not yet willing to use the P2P Platform Systems) and people without mobile access to the Internet.

In the longer run, Traditional Providers (full-time industry workers) may end up adopting certain technologies that enable mobile Internet use, thereby achieving some of the cost efficiencies their P2P counterparts are already achieving. However, Traditional Providers will remain at a cost disadvantage as long as they have to recover capital costs from providing goods and services to markets in which P2P Providers also compete

Regulators

In the short run, Regulators lose taxes, dues, and fees associated with business of Traditional Providers that is lost to P2P Providers who are not yet required to pay all the taxes, dues, and fees that Traditional Providers do.

In the interim, Regulators will pass new regulations (or modify existing ones) to impose taxes, dues, and fees on the P2P Platforms and P2P Providers at a minimum that protect consumer interests (assure minimum standards of safety and quality).

In the long run, Regulators will lose any payments made to them by Traditional Providers lobbying for regulations to restrict competition, which will most likely eventually be lifted. Perhaps some of these losses will be mitigated by new payments made my P2P Providers/Platforms lobbying for new rules and regulations to support their P2P Systems.

The P2P Systems will most likely end up expanding the market by increasing entry by new Users at the bottom end of the value chain who had previously been priced out of the market. In this case, Regulators will end up generating revenues from new taxes, dues, and fees imposed in the interim, associated with the increased amount/value of transactions undertaken in the P2P System.

P2P Platforms

P2P Platforms will be winners in the P2P Platform Game. These businesses will end up facilitating all kinds of new transactions between Users and Providers in areas that I personally cannot even imagine yet, and most likely earning a bundle in the process. The new transactions will be both infra-marginal – stealing business from Traditional Providers in various markets – as well as inter-marginal – bringing new Users into the market that had previous been priced out.

The successful Platforms will be those who are best able to develop business practices and algorithms that (i) keep undesirables out of the market, (ii) minimize any liability and/or harm that does or might occur against either Providers and/or Users, and (iii) assume liability for that harm.

P2P Providers

P2P Providers will generally be winners (see Other Winners and Losers section below for a possible exception). They will have the flexibility to generate income on their excess capacity, if and when it suits them, and on their own terms. They will have the opportunity to meet new people and enjoy a sense of community. In “How Airbnb and Lyft Finally Got Americans to Trust Each Other,” Jason Tanz reports

Ultimately, this is what separates companies like RelayRides from the eBay-like person-to-person marketplaces that came before. When you buy a camera on eBay, you only know your seller as NikonIcon1972. In the sharing economy, we aren’t anonymous. We may not meet our trading partners face-to-face, as in the RelayRides example. But because our transactions are often linked through our Facebook accounts—some version of our real identities—we are dealing, even virtually, with real people. It’s a digital re-creation of the neighborly interactions that defined pre-industrial society. Except that now our neighbor is anyone with a Facebook account.

P2P Users

P2P Users are definite winners in the Game. They gain flexibility, benefit from lower prices, are able to enter new markets, meet new people, and enjoy a sense of community.

Other Winners and Losers

As noted in the Second Order Effects section above, city residents may end up benefitting from lower costs of living and less congestion and pollution from having fewer cars on the road. At the same time, however, it’s possible that the Jevons paradox kicks in, as the lower costs of living attract an overabundance of new immigration into cities, thereby increasing the overall level of congestion and pollution.

There is also the possibility that the P2P Platforms end up assuming some of the more undesirable practices of more Traditional (entrenched) Providers. In particular, in “Can We Stop Pretending the Sharing Economy Is All About Sharing?” Time notes

Some of the “sharing economy” businesses are themselves being accused of using ruthless, old-fashioned money-making tactics. An Alternet post pointed out that in light of surge pricing, the lack of regulation, and labor exploitation, the ride-sharing company Uber has a lot in common with “old-school capitalist companies.” In Seattle and Los Angeles, among other places, Uber drivers—those who directly benefit from sharing economy transactions—are battling it out to get more protection and rights as employees.

Drivers for Uber and its ride-share competitor, Lyft, have also been complaining that the pay is decreasing. This is especially hard for drivers to stomach when they read about Uber being worth $17 billion. Why can’t such a valuable sharing economy business, you know, share the wealth, drivers are wondering.

In this case, Users, both P2P and Traditional, might still benefit from lower prices, but P2P Providers might end up getting the short end of the stick, along with Traditional Providers, by being able to retain insufficient income for their efforts.