The curious economics of the “sharing economy”

Venkatesh Rao published a thought-provoking piece on Ribbonfarm today, comparing the deal-seeking masses who use Groupon and Airbnb with a swarm of locusts. It’s a bit of an intense analogy, but the basic premise is that certain aggregator business models are terrible for the underlying businesses, and that platform middlemen are capitalizing on the predatory instincts of deal-seekers:

They draw in nomadic deal hunters from a vast surrounding region who are unlikely to ever return; … most deal-hunters carefully ensure that they spend just the deal amount or slightly more; … a badly designed offer can bankrupt a small business.

Locust economies are built around 3-way markets: a swarming platform “organizer” player who efficiently disseminates information about transient, local resource surpluses, a locust species in dormant grasshopper mode, and a base for predation that exhibits a scarcity-abundance cycle.

(You should probably just go read it.)

Rao’s piece paints collaborative consumption and daily deals with the same broad brush, but he’s getting at something interesting: despite the idealism underlying the sharing economy, the attempt to turn sharing into big business hasn’t meaningfully transformed self-serving consumer behavior. Most people aren’t there for the sharing; they’re there for the savings.

Building a marketplace requires incentivizing both buyers and sellers. In the idealized sharing economy, the buyer is looking for a unique and authentic experience (community), and values access over ownership (sustainability). In reality, he is most often looking for a deal. The economic incentive is more honestly articulated on the other side of the market: the seller is looking to capitalize on a resource that is otherwise sitting around unused.

The reality of the “sharing economy” is that most of the p2p startups born of the movement aren’t going to survive. They’ve taken venture funding, but they aren’t venture-fundable businesses. The economics just don’t work.

Airbnb has become a household name. It’s the X in “We’re X-for-Y” in pitch decks across Silicon Valley. It’s a success story. And this is because it’s one of the very few exceptions to the locust phenomena described by Rao1. Even assuming bargain-hunting buyers and a cut taken by middlemen, Airbnb generates material value for the seller. The average rental on Airbnb varies quite a bit by city, but in NYC and SF a seller can earn ~$150/night renting her place. Even with Airbnb’s 6-12% cut, renting an underutilized apartment for a weekend nets ~$275. It’s also a low-friction experience for the seller: the apartment is in a fixed location (the buyer comes to you), lockboxes and entry systems are largely a solved problem, and the platform enables cleaning fees and security deposits. It’s tough to do enough damage to render a place uninhabitable (low rate of depreciation). There is a meaningful rate of return relative to the time necessary to manage a place. And on the buyer side, Airbnb yields significant savings over staying in most hotels (it is also, often, a genuinely unique experience). Low friction, high rate of return, benefits for all involved…a thriving marketplace.

No locusts.

But even within the same economic climate that ostensibly helped Airbnb succeed, there has been no comparable runaway success in p2p sharing of cars, bikes, or household goods. And that’s because renting out those items is a high-friction experience with a low rate of return. Example: The average cost to rent a car on RelayRides or GetAround in San Francisco is $8/hr. The car owner keeps 60%, so he’s making $4.80 per hour before taxes. And for that, he’s putting more miles on his car (a rapidly depreciating asset), risking moral hazard on the part of the borrower, and taking a chance on an accident rendering the asset potentially unusable for a long period of time. Sure, the middleman platforms offer insurance, but most people who have endured the hassle of an insurance claim – and managing vehicle repairs – will tell you that $4.80/hr simply isn’t worth it.

As the seller is earning $4.80/hr, the platform is collecting $3.20…and paying for insurance, marketing, salaries, etc. Given how low revenue per transaction is, this is a model that needs to hit massive scale in order to generate meaningful returns for the venture-backed middleman. Because the locust problem is an equilibrium problem2. Incentivizing enough sellers to participate in the market at rates low enough to compete with Zipcar3 (and with each other) is tough. But if the rate is pushed high enough to make it worthwhile for the seller – and to generate a sufficient cut for the middleman – it is a far less exciting prospect for the buyer4. Buyers will only sacrifice convenience and quality if the price is compelling.


Unless, of course, the buyer and seller are participating in the market because they’re truly motivated, first and foremost, by community and connection. Those are powerful forces. They’re the reason that co-op businesses and credit unions thrive in many neighborhoods. At a smaller scale, typically within a discrete community with strong ties, p2p collaborative consumption works.

No locusts.

But also: no venture-backed middlemen.

1. Rao thinks it is but I disagree.
2. Which Airbnb may also encounter at some point
3. Zipcar, which rents in SF at ~$10/hr – $2 more than RelayRides’ average – is a known quantity. Clean cars, effortless entry, convenient to park and return. At this time, it seems they’re still operating at a loss.
4. The exception to this may be markets in which regulatory arbitrage enables P2P businesses to thrive (ie, Lyft, Sidecar, Uber confronting the false scarcity of the existing medallion system). It remains to be seen if this is temporary success; it’s somewhat dependent on legislation and enforcement.