How does competition among lodging sharing platforms affect welfare and profits?

• Published date: 01 February 2021
• Author: Esther Gal‐Or
• Date: 01 February 2021
• DOI: http://doi.org/10.1111/jems.12397

J Econ Manage Strat. 2021;30:45–62. wileyonlinelibrary.com/journal/jems © 2020 Wiley Periodicals LLC

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Received: 9 August 2019

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Revised: 9 June 2020

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Accepted: 21 July 2020

DOI: 10.1111/jems.12397

ORIGINAL ARTICLE

How does competition among lodging sharing platforms

affect welfare and profits?

Esther Gal‐Or

Katz School of Business, University of

Pittsburgh, Pittsburgh, Pennsylvania

Correspondence

Esther Gal‐Or, Katz School of Business,

University of Pittsburgh, Pittsburgh,

PA 15260.

Email: esther@katz.pitt.edu

Abstract

We investigate the likely effect on prices, consumer surplus, and profits of

intensified competition among peer‐to‐peer lodging platforms. We find that

intensified competition in the sharing economy may give rise to some sur-

prising results. For instance, intensified competition may allow platforms to

charge higher fees from peer suppliers and lead, therefore, to a decline in

consumer surplus. Only if the market of professional hoteliers is highly

competitive, intensified competition among platforms leads to the traditional

outcome that the entry of more platforms leads to lower fees charged from

consumers and to enhanced consumer surplus. We also find that platforms

may actually earn higher profits when there is intensified competition among

professional hoteliers. In addition, while intensified competition among pro-

fessional hoteliers leads to a decline in the fees that platforms can charge

customers, it may actually result in higher lodging prices. We explain these

counterintuitive results by the dual role that the lodging price plays in affecting

the welfare of individuals active in the sharing economy. While a higher price

has an adverse effect on the welfare of demanders of lodging it benefits peer

suppliers of lodging because a higher lodging price raises the compensation

they receive when offering lodging capacity to a platform.

1|INTRODUCTION

The sharing economy, also referred to as peer‐to‐peer economy or collaborative economy, supports the sharing of

underutilized physical assets and skills among people. Presently, the sharing economy is dominated by a very small

number of platforms that act as intermediaries to bring together suppliers and demanders of a given shared service. In

the lodging market, Airbnb has become a global phenomenon in spite of giving rise to a fair share of controversy. In

2018, Airbnb was valued at 38 billion dollars, up from 31 billion the previous year. However, the firm has also faced a

myriad of legal and regulatory barriers that may slow its growth. The literature has pointed out reasons for the legal

challenges facing sharing platforms. These reasons, as summarized in Cohen and Sundararajan (2015), include the

existence of asymmetry of information between the supplier and demander of service (as when a renter may not know

the quality of the listing or its proximity to city center or to public transportation). The emergence of externalities (as

when a noisy Airbnb guest imposes costs on other residents or when the rent of local tenants rises as more of the

housing capacity is allocated to nonlocal tourists). The blurring of boundaries between the personal and the profes-

sional (because Airbnb hosts are not professional hoteliers and, therefore, are not subject to the same regulatory

environment or taxation.)

In view of the disruptions the sharing economy brought to the lodging market some jurisdictions, started to regulate

the operation of Airbnb and some even imposed bans on short‐term rentals, altogether. Several recent studies have

investigated the effectiveness of and the need for regulation to overcome the new challenges created by the emergence

of Airbnb. Wegmann and Jiao (2017), use websraped data from Airbnb to analyze the geographic patterns of regulation

in five U.S. cities and provide principles to cities in managing the impact of the sharing economy. They stress the

importance of enforcement and the need to distinguish between “mom and pop”hosts and those operating at a

commercial scale. Leshinsky and Schatz (2018) is another paper that highlights the importance and challenges of

enforcing regulatory measures aimed at mitigating the negative externalities caused by Airbnb. Yuxin, Yuanyuan, and

Ho (2018) find that regulation has been effective in reducing the extent of asymmetric information about the quality of

listings. In contrast, Gurran, Searle, and Phibbs (2018) investigate whether the “Coase Theorem”can address the

problem of negative externalities created by the sharing economy. They conclude that a Coasian approach may inspire

more pragmatic alternatives to traditional forms of urban regulation of Airbnb.

While regulation and the restrictions imposed on Airbnb's operations in many cities impose a real threat to its

profitability and growth, another possible threat emerged from the entry of competing sharing platforms to the market.

Platforms such as Tripping.com, HomeToGo, FlipKey, HomeAway, VBRO, and more are starting to erode the dom-

inance of Airbnb. Our focus in this paper is to understand the implication of such competition among multiple sharing

platforms on the profitability of each of them. We also investigate how competition among platforms and professional

hoteliers affects lodging prices, service fees charged by the platforms, the profits of professional hoteliers, and the

welfare of consumers.

In our model, we allow individuals in the population to offer a portion of their home to a lodging sharing platform,

where the size of homes wealthier individuals own is bigger. The supply side of the market consists of nprofessional

hoteliers and lsharing platforms. We focus on the derivation of the Cournot equilibrium, where each hotel chooses how

much lodging capacity to install and each platform chooses how much capacity it wishes to attract from individuals in

the population. The per‐unit lodging price and the service fee each platform charges are determined at the equilibrium

to clear the market. The equilibrium prices affect the decision of individuals of whether to demand lodging when

vacationing and whether to offer some of the lodging capacity they own to one of the platforms, namely to become peer

suppliers. We investigate how an increase in the number of competing hotels and competing platforms affects: the

number of individuals demanding and supplying lodging capacity, the equilibrium lodging price and service fees

charged by platforms, the profits of professional hoteliers and platforms, and the welfare of consumers.

We find that the existence of the sharing economy may yield some surprising results. For instance, intensified

competition among platforms may allow platforms to charge higher fees from peer suppliers. It may reduce, therefore,

the number of individuals interested in supplying lodging capacity to the platforms and to a decline in consumer

surplus. Only if the market of professional hoteliers is highly competitive, intensified competition among platforms

leads to the traditional outcome that the entry of more platforms leads to lower fees charged from consumers and to

enhanced consumer surplus. In contrast, we find that intensified competition among professional hoteliers always leads

to the traditional result of improving the welfare of consumers. We also find the surprising result that platforms may

actually earn higher profits when there is intensified competition among professional hoteliers.

The reason the sharing economy may introduce the above nontraditional results is the counteracting effects that

prices have on the welfare of individuals as demanders and suppliers of lodging. While a higher lodging price may hurt

an individual when she demands lodging while on vacation, it may benefit her by raising the compensation she receives

when supplying a portion of her house to a platform. This higher compensation allows the individual to increase

consumption. To further illustrate how the above contradictory forces affect the equilibrium prices, consider an

environment where fewer hotels compete in the market (i.e., nis smaller.) We demonstrate that with reduced com-

petition among hotels, platforms can charge a higher service fee from peer suppliers. This implies that individuals

receive less additional income when becoming peer suppliers. With lower income, individuals are less likely to vaca-

tion. This puts downward pressure on the price of lodging, as the demand of lodging declines. We get, therefore, the

surprising result that weaker competition among hotels might actually lead to a lower lodging price.

The model we develop is derived from an earlier work (Gal‐Or, 2018) on the sharing economy. As in this previous

paper, we develop a general equilibrium model to capture the optimal behavior of professional hoteliers, sharing

platforms, and individuals active in the sharing economy. However, whereas in the previous paper competition is

between a single professional hotel and a centralized intermediary operating the platform (Airbnb), in the current paper

we allow for competition among professional hoteliers and among multiple platforms.

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