Mi Casa Es Su Casa? Assessing the ‘Collaborative’ Economy

Anyone who has used services such as Airbnb (vacation rentals) or Wheelz (car sharing) has already participated in the “collaborative consumption” or “peer-to-peer rental” economy. (The Economist recently ran a cover story on this topic.) The idea behind these services is simple. If you have a high-value asset—say an apartment, house, car, or boat—that is not being used 24-7, you can have others rent it from you when you are not using it yourself. In the case of Airbnb, if business takes you out of town for a week, your place of residence can be offered, via Airbnb, to others who may be visiting your town in your absence and are willing to pay what you believe your house or apartment is worth a night. This way, you, the host, get to make some money when times are tough, the customer gets the convenience of an apartment without paying the price of a hotel, and Airbnb makes money off that transaction.

Fundamentally, this is the concept of sharing, not out of altruism, but for a fee. Prima facie, one might be concerned about allowing strangers to cavort on one’s bed or to put pedal to metal in one’s car. However, barring a few unfortunate Airbnb incidents (the trashing of an apartment in California and the conversion of another apartment into a brothel in Stockholm), most hosts and customers of this service seem to be satisfied with the outcomes. While financial considerations clearly play an important part, the role played by the internet and social media in making people comfortable with such a concept cannot be overstated—after all, consumers seem to be perfectly willing to trust strangers when making choices about a variety of products and services. Importantly, new institutions have been created by enterprising individuals; these institutions recognize the scope of the inefficiency in asset use, provide a platform for interaction, and finally, provide protections to those willing to open up their homes and automobiles to strangers (e.g., by providing insurance coverage).

While the growth of these services has been remarkable, it will ultimately be limited by hosts’ comfort level. Basically, I might be willing to invite my friends or my friends’ friends into my home; at the same time, I might be less willing to have a perfect stranger in my house. To paraphrase Carl Fredricksen, the irascible character played by Ed Asner in the movie Up, “He can have my house . . . when I’m dead.”

This is where I believe sites such as Facebook can play an important role. Given knowledge of my social network and those of (say) my immediate friends, social media sites can play a role in limiting the access of my property to only these individuals. The host can decide how many “layers” of friends she is willing to tolerate in her home. Clearly, limiting access to a tighter circle makes one’s home less likely to generate income; on the flip side, there is greater assurance that the prospect of vandalism is limited by greater personal knowledge of the renters (or at least their friends). Of course, Facebook will then need to figure out a way to provide the types of services and guarantees that outfits such as Airbnb provide. Whether the economics of something like this works out for the company is something it needs to assess.

Another marketing issue of interest is the disruptive nature of the collaboration economy to the traditional hospitality business. A hotel chain whose customers are interested in apartment-style living at a lower cost should be concerned about the growth in such a service. Similarly, a car-rental company could lose business and have to lower prices to compete with such services as Wheelz.

As Clayton Christensen, author of The Innovator’s Dilemma, points out, there are several approaches to dealing with disruptions. The first is to focus on and invest in the traditional business. The idea here is a “fortressing” strategy where the company puts its resources into keeping its current client base satisfied while trying to acquire new customers that are similar to that base. The second approach is to attack back—disrupt the disruption. In this case, such an approach might be difficult to implement—that is, lowering costs without compromising the level of service quality could be problematic. A third alternative is to adopt the innovation by playing both games at once. This is perhaps the strategy closest to the one adopted by some companies in the car-rental business. For example, a lead investor in Wheelz is Zipcar, a more traditional car-sharing service and itself a disruptor of the car-rental business. Zipcar, in turn, has recently been taken over by Avis—a traditional car-rental company. In this way, Avis is playing in both the traditional and disruptive businesses at the same time. A final approach is to embrace the innovation completely and scale it up. This would require the companies in the traditional businesses to abandon that way of doing business in favor of the collaborative approach. While this could occur “ultimately,” it is not something that one expects to see in the very near future.

The collaborative economy is still young but offers many interesting possibilities. In any event, traditional businesses ignore this phenomenon at their own peril.

Pradeep K. Chintagunta is the Joseph T. and Bernice S. Lewis Distinguished Professor of Marketing at Chicago Booth.