Peer‐to‐peer sharing in the lodging market: Evaluating implications for social welfare and profitability

• Date: 01 October 2018
• Author: Esther Gal‐Or
• Published date: 01 October 2018
• DOI: http://doi.org/10.1111/jems.12247

686 © 2018 Wiley Periodicals, Inc. wileyonlinelibrary.com/journal/jems J Econ Manage Strat. 2018;27:686–704.

Received: 18August 2017 Revised: 6 December 2017 Accepted: 8March 2018

DOI: 10.1111/jems.12247

ORIGINAL ARTICLE

Peer-to-peer sharing in the lodging market: Evaluating

implications for social welfare and profitability

Esther Gal-Or

Esther Gal-Or, Katz Schoolof Business,

Universityof Pittsburgh, Pittsburgh, PA,

15260, USA (Email: esther@katz.pitt.edu)

Iwish to express my gratitude to the insightful

commentsof an anonymous referee.

Abstract

With a focus on the lodging market, we investigate the nature of competition between

a peer-to-peer platform and a traditional lodging provider (hotel), in an environment

where both possess the market power to affect the final lodging price established in

the market. To understand such an environment, we investigate the strategy choices

of the three types of players active in this market: the platform, the hotel, and indi-

viduals in the population who consider supplying or demanding lodging capacity. We

use our analysis to predict how the emergence of the peer-to-peer platform affects the

profits of the hotel and the welfare of consumers. We characterize two types of equi-

libria: Partial Coverage and Full Coverage. The formertype ar ises if eachindividual's

demand for lodging while on vacation is relatively low in comparison to her supply.

In this case, the level of demand originating from vacationers is insufficient to make

it worthwhile for the platform to lower its service fee in order to attract capacity from

every individual in the population. In contrast, when the demand for lodging while

on vacation is relatively high, it may become profitable for the platform to imple-

ment the Full Coverage equilibrium, in which case every individual supplies lodging

capacity to the platform. We demonstrate that the entry of the platform to the market

will definitely increase the consumer surplus if the platform chooses to implement the

Full Coverage equilibrium. At the Partial Coverageequilibrium, the consumer sur plus

might actually decline upon the entry of the platform. This might happen because the

entry of the platform can sometimes lead to higher lodging prices, and as a result,

can hurt individuals when vacationing. Because the entry of the platform raises the

income of individuals in the economy, their willingness to pay for lodging while on

vacation may rise. Such higher prices may also sometimes lead to higher profits for

the hotel, in spite of the competition with the platform. In the special case that indi-

viduals experience no disutility when offering a portion of their housing space to the

platform because this space has no alternative use for the individual, the entry of the

platform will always lead to higher consumer welfare and lower profits for the hotel,

irrespective of whether Full or Partial Coverage arises as equilibrium.

1INTRODUCTION

The sharing economy, also referred to as peer-to-peer economy or collaborativeeconomy, facilitates the sharing of underutilized

physical assets and skills among people. Internet companies such as Uber, Airbnb, TaskRabbit are web platforms that bring

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together individuals who have underutilized assets and skills with people who would like to rent those assets short term. These

companies have experienced tremendous growth in recent years. Airbnb, for instance, was valued at more than $30 billion in

June 2016, higher than the Hyatt hotel chain. It claims to have listings in more than 34,000 cities in 191 countries, and to have

served more than 60 million guests since its founding in 2008. Similarly,Uber was valued around $66 billion (higher than Hertz

or Avis) in its last investment round in June 2016. It is currently operating in 76 countries and in more than 506 cities (August

2016).

The sharing economy firms have brought significant economic benefits including an increase in employment (in case of Uber

and TaskRabbit, for instance) and a source of additional income to individuals in the population (in case of Airbnb, for instance).

However, the firms have also faced a myriad of legal and regulatory barriers that may slow the growth of these peer-to-peer

platforms. The literature has pointed out reasons for the legal challenges facing these platforms. These reasons, as summarized

in Cohen and Sundararajan (2015), include the following: the existence of asymmetry of information between the supplier and

demander of service (as when a passenger may not know the qualifications or intentions of the driver in the case of Uber); the

emergence of externalities (as when a noisy Airbnb guest imposes costs on other residents); the blurring of boundaries between

the personal and the professional (because Airbnb hosts, for instance, are not professionalhoteliers and, therefore, are not subject

to the same regulatory environment or taxation).

In this paper, we do not try to propose remedies to the above market failures that the sharing economy might introduce.

Instead, with a focus on the lodging market, we wish to understand the nature of competition between a peer-to-peer platform

and a traditional lodging provider (hotel), in an environment where both possess the market power to affect the final lodging

price established in the market. Given the large market share of Airbnb in peer-to-peer lodging, we believe that this platform

has the market power to set the fees it charges individuals who supply it with lodging space. Similarly, there are many geo-

graphic locations where there are only a few traditional hotels established in the market. To understand such an environment,

we investigate the strategy choices of the three types of players active in this market: the platform, the hotel, and individuals in

the population who consider supplying or demanding lodging capacity. We use our analysis to predict how the emergence of the

peer-to-peer platform affects the profits of the hotel and the welfare of consumers.

Recently, there have been several analytical studies exploring the implications of the sharing economy, on social welfare, and

on the profits of brick-and-mortar firms. See, for instance, Benjaafar, Kong, and Li (2016), Einav, Farronato, and Levin (2016),

Jiang and Tian (2016), and Weber (2016). However, none of these studies addresses the question of how the platform chooses

its commission fee, and how this choice is likelyto affect t he price of the product in the market. Moreover, in these papers, there

is great emphasis on the decision of individuals in the market on whether to own or to rent the product, and less emphasis on the

nature of competition between the professional sellers in the market and the peer-to-peer platform that trades with individuals

who are active in the sharing economy. In contrast to these studies, we characterize the equilibrium when the distribution of

housing ownership in the population has been already determined, and consider an environment where both the hotel and the

platform have the power to influence the final price of lodging.

We consider an economy where the supply of lodging capacity originates both from individuals in the population who offer a

portion of their housing capacity to a lodging platform and from a traditional hotel. The size of the housing capacity that different

individuals in the population own varies, and they can each decide what portion of their house to supply to the platform. In our

model, individuals who own a bigger house, earn also higher income. Individuals may also choose to demand lodging capacity

while on vacation. They can satisfy their demand by procuring capacity either from the platform or from the hotel. When an

individual supplies lodging capacity to the platform, she can increase her income. However, she may also incur some disutility

for having to give up a portion of her house to guests. Each individual decides how to allocate her total income, consisting of

earned income and of revenues from supplying capacity to the platform, between two consumption goods, vacationing and a

numeraire good, to which we refer as general consumption.

We model the environment as consisting of two stages. In the first stage, the hotel chooses his level of investment in lodging

capacity and the platform chooses the service fee it charges individuals who supply capacity to the platform. At the same stage,

individuals in the economy choose whether to participate as suppliers, as demanders, or as both suppliers and demanders of

lodging. In the second stage of the game, a single per-unit price of lodging capacity is determined in order to clear the market,

namely, to ensure that the capacity of lodging supplied is equal to the capacity of lodging demanded.

In our basic formulation, we assume that the utility of the individual increases linearly with her levelof consumption (implying

that marginal utility from general consumption is a constant independent of income). In this environment, it is alwayseasier for

the platform to attract capacity from individuals who plan to also vacation than from nonvacationers.Because vacationers can use

the revenues from supplying capacity to enhance their utility both while vacationing and from increased general consumption,

they are willing to offer capacity even when the platform charges them a relatively high service fee. We show that in such an

environment, it is never optimal for an individual to demand lodging without supplying any. Instead, two types of equilibria