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24 COMMUNICATIONS OF THE ACM | NOVEMBER 2014 | VOL. 57 | NO. 11
Vviewpoints
Economic and
Business Dimensions
The Dark Side of
the Sharing Economy …
and How to Lighten It
Improving the sharing economy will require addressing myriad problems.
ists do not always respect the sensibil-
ities of long-term residents. Conflicts
over tenement buildings helped mo-
tivate the first U.S. zoning laws5 that
sharing now circumvents. In addi-
tion, short-term rentals create short-
ages of affordable long-term housing
when nightly rates exceed monthly
rentals. Passing that tipping point
can hurt individuals at lower income
levels11 even as it boosts income for
homeowners. It takes time to bal-
ance conflicting needs, but sharing is
growing quickly.
No Soup for You. In a famous epi-
sode of “Seinfeld,” one of the lead
characters was denied soup by a re-
nowned but humorous cook.a Shar-
ing biases online is as natural as
sharing cars and couches. But when
a See the No Soup for You episode summary:
http://bit.ly/X5rBCE.
BECAUSE WE LOVE the shar-
ing economy we want to im-
prove it. But most pundits
are telling only half the tale:
Naysayers are too bombas-
tic and boosters too unrealistic. Im-
proving the sharing economy means
dealing realistically with its dark side.
To assure sharing will grow up, we
need to avoid market and regulatory
failures that allow parts of the market
to gain unfair advantage over others.
Regulatory arbitrage is not the right
answer. Instead, sharing must ulti-
mately create real consumer value.
It is not too early to begin. Shar-
ing is quickly spreading. People al-
ready have access to rooms (AirBnB,
Roomorama), tools (SnapGoods)
cars and bikes (RelayRides, Wheelz),
and ad hoc taxi services (Uber, Lyft).
These two-sided platforms offer many
advantages by unlocking the value
inherent in sharing spare resources
with people who want them.4 The size
of the sharing economy is estimated
at $26 billion.1,16 Internet mediaries
now match demand and supply in
real time on a global scale. The poten-
tial macroeconomic gains are colos-
sal, but problems abound.
The Sharing Economy’s Dark Side
The Hotel Zone. Transients and tour-
DOI:10.1145/2668893 Arvind Malhotra and Marshall Van Alstyne
It takes time to
balance conflicting
needs, but sharing
is growing quickly.
NOVEMBER 2014 | VOL. 57 | NO. 11 | COMMUNICATIONS OF THE ACM 25
viewpoints
V
ILLUSTRATION BY MICHELA BUTTINGNOL
ing work (such as Mechanical Turk
or TaskRabbit) “on the cheap” strips
opportunity from the bottom of the
pyramid, as jobs move from tradi-
tional manufacturing and services to
micro-services.12 Micro-outsourcing
that pays for only the task at hand can
shed overhead but mortgage the fu-
ture by covering only marginal costs
and leaving nothing for new skills,
health care, or retirement. If informa-
tion goods are an indicator, marginal
costs approach zero, so even cover-
ing them might not pay much. Jaron
Lanier’s book Who Owns the Future?9
calls this issue a matter of dignity: “if
you have to sing for your supper for
every meal, you’re … one run of bad
luck from losing [everything].”d Going
freelance is hollow freedom when the
wage for labor is free.
d See http://bit.ly/1nSYIn9.
biases are unfounded and consumers
or producers bludgeon each other un-
fairly in social media, who will inter-
cede? Biases can mislead, ostracize,
shill unearned praise, and damn wor-
thy competitors. A recent study found
16% of Yelp reviews are not genuine.10
By posting unfounded complaints,
customers can punish providers for
their transgressions. In some cases,
providers will have to fight back to
save their reputations.b
Taxing the Taxi. Unlike licensed
taxi drivers, private citizens provid-
ing ride-share services do not always
purchase medallions. They also do
not take licensing exams, or neces-
sarily carry commercial insurance.
For these reasons and because they
are not required to honor all ride re-
b One restaurateur fights back against an unjus-
tified Yelp review: http://bit.ly/1tTJDTq.
quests, a German court banned Uber’s
basic service throughout the nation.3
Licensed taxi drivers are saddled with
greater costs, which hampers their
ability to compete with ride sharing.
Arguably, ride sharing is growing by
circumventing costs and regulations
that govern incumbent businesses.
Ride sharing can exploit loopholes to
avoid rules and taxes. When this oc-
curs, the sharing economy becomes
the skimming economy.
Shared Economies or Shared Serf-
dom. A commentator at The New York
Times concluded that what he earned
by ride sharing barely covered gas and
depreciation.c Peer-to-peer exchange
based on sharing ideas or perform-
c See comments on Sundararajan, A. “Trust-
ing the ‘Sharing Economy’ to Regulate Itself”
Economix Blog New York Times (Mar. 3, 2014);
http://nyti.ms/1krGSHo.
26 COMMUNICATIONS OF THE ACM | NOVEMBER 2014 | VOL. 57 | NO. 11
viewpoints
Whose Ox Gets Shared? Sharing
creates a subtle tug-of-war between
the primary producer and secondary
sharer. Secondary sharing can be-
come tertiary taking. Consider the ex-
treme case of a Netflix subscriber who
pays $20 per month, rents three DVDs
from Netflix, and then rents each for
$1 per night to other individuals. The
subscriber makes $90 (1×3×30) each
month while paying substantially
less for an asset he or she never owns.
Similar to the way put and call op-
tions share the value of other people’s
stocks, sharing allows us to go long or
short on physical assets. It might be
economically efficient, but it can harm
the demand for Netflix and the people
who produced the movies. Broadcast-
ers sued the startup Aereo for leasing
a device that let individuals capture
broadcast TV signals to stream shows
to devices they (or others) own. The
suit reached the U.S. Supreme Court
and, on the basis of copyright in-
fringement, the U.S. Supreme Court
ruled against Aero.e The City of San
Francisco likewise shut down a sub-
versive sharing service. Counselors
issued a cease and desist order to pro-
ducers of a mobile app that rewarded
drivers for sharing news of their will-
ingness to vacate public parking. It
then auctioned off their spaces.f In-
sider sharing just became the latest
form of insider trading.
The Dark Side of the Moonlighting.
Last New Year’s Eve, an off-duty driv-
er for the ride-sharing service Uber
killed a pedestrian while hunting for
fares. Since the driver was a “contrac-
e Steel, E. “Stung by Supreme Court, Aero Suspends
Service;” New York Times (Jun. 25, 2014), A20.
f Coté, J. “SF Cracks Down on ‘Monkey Parking’
Mobile App” June 23, 2014; http://bit.ly/ToFDNA.
tor,” the sharing service would not
compensate the victim’s family.g The
contract stipulates that the service is
a matching platform and “the com-
pany does not provide transportation
services, and … has no liability for ser-
vices ... provided by third parties.”h
Who then will bear the costs of such
disasters? Jaron Lanier says these new
business models enjoy profits while
offloading risk to others. When soci-
ety picks up the tab, these new busi-
ness models raise concerns. Maybe
they are no cause for celebration.
Lightening the Dark Side
Absorb Risks that Benefit the Ecosys-
tem. Shedding risk and never admit-
ting culpability is standard lawyers’
advice. In following this advice, Uber
did not indemnify its driver yet has
reversed itself dramatically expand-
ing coverage. Putting share-rides into
taxi-ride perspective, New York City
experienced 44 taxi-related fatalities
in 2009 alone.i
History informs us about the will-
ingness of new businesses to accept
risk. Banks originally opposed the
Fair Credit Reporting Act (FCRA),
complaining about the increased lia-
bility and responsibility for unauthor-
ized transactions. Banks argued that
FCRA would promote fraud, encour-
age people to be careless with credit
cards, and reduce bank willingness to
extend credit. Precisely the opposite
occurred. The FCRA passed in 1970,
with amendment 15 US § 1643 later
limiting consumer liability to $50 for
fraudulent credit card use. However,
banks ultimately learned that pro-
tecting customers is good business:
increased credit card use more than
offsets growth in fraud-related costs.
Most banks now do not even hold
consumers responsible for the $50. If
sharing moves in the same direction,
sharers and society will be protected.
Invest in Your Customers. As a
startup, Airbnb could not gain traction
with renters as long as people put up
low-quality listings and photos of their
g Diamicis, C. “Uber driver hits, kills 6 yr old
girl. Is ‘Not our problem’ still an appropriate
response?” (Jan. 2, 2014); http://bit.ly/190hsft.
h See http://bit.ly/1pxnIgK.
i New York City Pedestrian Safety Study: Tech-
nical Supplement (Aug. 2010). http://on.nyc.
gov/1AqODmU.
History informs
us about the
willingness of new
businesses
to accept risk.
ACM
Transactions on
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NOVEMBER 2014 | VOL. 57 | NO. 11 | COMMUNICATIONS OF THE ACM 27
viewpoints
Tax Fairly and Don’t Promote Arbi-
trage. The City of Amsterdam has be-
gun to support sharing economies.15
Hosts renting their homes to others
pay income and tourist taxes, and
must ensure neighbors stay neighbor-
ly. Private individuals do not require
liquor licenses or kitchen inspections
as do major hotel chains. Regulations
that lie between the individual and in-
dustrial levels in this fashion can be a
wiser way to handle tax arbitrage. In-
dividuals do pay reasonable taxes that
support the community but do not
pay at industrial levels.
Current laws that gouge one group
to benefit another also need reform.
If technology permits low-fee provid-
ers to substitute for high-fee ones,
simplifying and designing laws that
do not promote arbitrage is possibly a
better answer. When was the last time
your airport car rental cost less than
you expected? Sticker shock sets in
when cities impose head, gas, airport,
and other taxes on tourists. Taxi me-
dallions help regulate taxi services,
but also create cartels where medal-
lions offer investment-grade returns
to their respective cities.7 Taxes on
private cars used in shared services
might make sense because the roads
still require maintenance. However,
balance is essential. Internet-enabled
sharing does not mean “no taxes,” as
Amsterdam has shown.
Create a FICO of Reviews and
Fair Access of Resources
To a great extent, the viability of
shared services hinges on the quality
of review systems because people rely
on them to decide whether and what
to purchase. Authenticating the va-
lidity of reviews is critical to prevent
abuse. An independent agency might
help prevent glowing “sock puppet”
reviews or unfair criticisms. Certi-
fication might even deflate mutual
excess flattery. Credit scores and in-
formation have been monitored in a
similar fashion for many years by sev-
eral agencies, including FICO. Also
regulators must ensure public access
to public information. Sharing news
must not be used to make public re-
sources private. The sharing econo-
my requires that complete informa-
tion and trustworthy reputations be
available to all parties.
The problem is not whether to bury
or build the sharing economy: it is al-
ready on the ground. The gains are too
great to pass up because of misdeeds
on the part of a few self-serving actors.
The larger opportunity is to move for-
ward despite the disruption. In the
short run, platform firms should in-
demnify users and self-regulate the
health of their ecosystems. At the
same time, consumers should choose
sharing platforms based on short and
long-term gains as well as individual
and community benefits. Learning
and appropriate regulation for fair
reporting and fraud protection will be
central—although it will need a light
touch to encourage innovation while
still watching for problems. The task
is to share the pain and the wealth. If
this sharing happens, the wealth will
grow and endure.
References
1. Botsman, R. and Rogers, R. What’s Mine Is Yours: How
Collaborative Consumption Is Changing the Way We
Live. Collins, 2011.
2. Byers, J.W., Proserpio, D., and Zervas, G. The rise of
the sharing economy: Estimating the impact of Airbnb
on the hotel industry. Boston University School of
Management Research Paper (2013).
3. Eddy, M. German court bans Uber service nationwide.
New York Times Bits Blog (Sept., 2, 2014).
4. Eisenmann, T., Parker, G., and Van Alstyne, M.W.
Strategies for two-sided markets. Harvard Business
Review 84, 10 (2006), 92.
5. Erickson, A. The birth of zoning codes, a history.
The Atlantic (June 19, 2012); http://bit.ly/UxVvxZ.
6. Evans, D.S. Governing bad behavior by users of multi-
sided platforms. Berkeley Technology Law Journal 27,
2 (2012).
7. Keeley, L. NYC taxi medallions wheel in profits rivaling
S&P 500. Bloomberg (Aug. 6, 2010).
8. Knox, R. How Yelp can help disease detectives
track food poisoning. NPR (May 22, 2014); http://n.
pr/1oC9qPp.
9. Lanier, J. Who Owns the Future? Simon & Schuster,
2013.
10. Luca, M. and Zervas, G. Fake it till you make it:
Reputation, competition and Yelp review fraud (2013);
http://hbs.me/Sjz92n.
11. New York Times Editorial Board. The dark side of
the sharing economy. (Apr. 30, 2014); http://nyti.
ms/1fB1JXj.
12. Rifkin, J. The rise of the sharing economy. Los Angeles
Times (Apr. 6, 2014); http://lat.ms/1AqMffY.
13. Schrage, M. Who do you want your customers to
become? Harvard Business Review Press, 2012.
14. Sundararajan, A. Trusting the ‘sharing economy’ to
regulate itself. Economix Blog, New York Times (Mar.
3, 2014), http://nyti.ms/1krGSHo.
15. Tam, D. Amsterdam officially approves new Airbnb
friendly laws. 2014; http://cnet.co/1tTJ2kp.
16. The Economist. The rise of the sharing economy. (Mar.
9, 2013); http://econ.st/1rwIfEx.
Arvind Malhotra (Arvind_Malhotra@kenan-flagler.unc.
edu) is a T.W. Lewis Scholar and Professor of Strategy
and Entrepreneurship at The University of North Carolina
Kenan-Flagler Business School, Chapel Hill, NC.
Marshall Van Alstyne (mva@bu.edu) is an associate
professor in the department of management information
systems at Boston University and a research scientist at
the MIT Center for Digital Business; Twitter: InfoEcon.
Copyright held by authors.
rooms. Improved listing quality dou-
bled revenues.j That led Airbnb to edu-
cate its users in how to improve their
listings.k Author Michael Schrage13
points out that investing in custom-
ers helps them create more value.
When they can create that value, the
ecosystem wins. Gary Swart, past CEO
of oDesk, had his company partner
with SkilledUP to grant access to thou-
sands of online courses because better-
trained freelancers charge more for
their work and deliver higher quality.
Community Policing and Self-Reg-
ulation. Platforms can be better than
governments at spotting stalkers,
running background checks on shar-
ing service providers, and responding
quickly to conflicts among members.
Platforms are closer to the action; and
they have an incentive to look after their
communities. That is how they make
money.6 Venture capitalist Nick Gross-
man says peer-sharing systems develop
scalable enforcement, like reputation
systems, that are more inclusive than
licensing regimes. Self-regulation can
work (For examples see The American
Medical Association and National As-
sociation of Realtors.14) Problems with
self-regulation arise from harm to non-
members, market power, and network
effects that encourage firms to engage
in anticompetitive behavior. But with
care, these problems can be avoided.
Moreover, sharing can also help gov-
ernment regulators. For example,
health inspectors are using Yelp rat-
ings to identify restaurants that may be
sources of food poisoning.8
j See http://bit.ly/1gmYXSd.
k See http://bit.ly/1dvNMm1.
The problem is
not whether
to bury or build
the sharing economy:
it is already on
the ground.
