The Rise of the Collaborative Consumption Economy

The U.S. economy needs to take advantage of the wealth of opportunities of collaborative consumption.

By SHARE
FE_120807_teamwork.jpg

David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.

Have a spare room in your house? You can now rent it out on airbnb.com. Don't need your car today? Share it on relayrides. Have a skill you want to trade? Post it on a TimeBank

All these transactions involve a new economic idea: "collaborative consumption." Some call it the "sharing economy" or the "peer-to-peer economy." Collaborative consumption unlocks hidden value in the assets we've acquired and skills we've developed. It allows us to get cash from them, or trade the right to use them.  

Collaborative consumption is a cornerstone of the new economy. It challenges the old economy idea that corporations must own the assets they need to make things and provide services. Instead, it encourages ownership to be widely distributed.  Collaborative consumption applies both to physical assets and human assets. Physical assets like homes and cars are sometimes vastly underutilized. This value can be tapped to generate cash for owners and offer lower prices for renters. Collaborative consumption also applies to people-powered services, particular when specialized knowledge and skills are involved. You may want to learn French and I may need help with my taxes. But neither of us wants to become a full-time teacher or consultant.

[See a collection of political cartoons on the economy.]

Why Collaborative Consumption Is Growing

Collaborative consumption is on the rise for several reasons. First, people need it. In a difficult economy, young people struggle to get traction with careers and they can't afford unnecessary spending. Other demographic groups face similar challenges as companies downsize and wages fall. Second, collaborative consumption is growing because it is more efficient. It boosts productivity, lowers barriers to entrepreneurship, and helps markets work even when cash is scarce. Third, it's growing because Web-based technology helps to enable it. The Internet helps to match up buyers and sellers, promote trust, and complete transactions. 

Collaborative Consumption Helps Relieve Inequality and Protects the Environment.

Collaborative consumption helps relieve inequality by promoting growth in places where people are cash-poor but have skills to offer. Collaborative consumption systems don't need cash. They can track people's time (called time-banking) and they can use point systems, like reward programs. Suppose I'm underemployed but I know how to complete simple car repairs. Suppose you're underemployed but you know how to fix bathroom tile. Neither of us could afford the work we need if we had to pay cash for it. But with time-banking, we can both get our needs met.

From an environmental standpoint, we must shift the economy so it needs less energy and less raw material to produce the things we value. This transformation is needed to solve the problem of climate change without making us feel deprived. Collaborative consumption can reduce the need to build as many cars, yet give us the transportation capacity we need. Collaborative consumption can reduce the need to build more hotels yet give us the lodging we need. Changes like these reduce the carbon footprint of the economy.

[See a collection of political cartoons on energy policy.]

The Trust Gap: A Challenge and an Entrepreneurial Opportunity

The biggest gap to collaborative consumption is neither supply nor demand; it's trust. People hesitate to share their car, their house, or other assets with people they don't know. Insurance policies don't meet the needs of collaborative consumers, producers, and service providers. The legal system has not caught up. Owners have sued renters for damage; renters have sued owners for personal injury. Third parties have sued both owners and renters. This unmanaged liability holds back growth. Better insurance products and legal structures are essential.

In theory, trust is created when buyers rate sellers and sellers rate buyers. While this works well on eBay, it has limitations. For some types of transactions, people don't buy or sell often enough for their behavior to support a useful rating. In other cases, online marketplaces allow sellers to scrub their listings of unfavorable reviews (as many merchants have alleged regarding Yelp). The industry needs to adopt a code of best practices that discourages manipulation and abuse of user ratings.

Another solution to the trust problem would be to combine information on trustworthiness from multiple services. For example, a high eBay seller rating indicates trustworthiness. If this information were combined with information such as credit rating, insurance status, and verification of ID it might provide an overall index of trust that sellers could rely across multiple product categories. But right now, it is not possible to track and verify a user's history across different services. This gap invites entrepreneurs to build new services that collect and aggregate information about who to trust.

[See a slide show of 5 bright spots in the U.S. economy.]

The Future of Collaborative Consumption

Collaborative consumption is a wide open field right now, but the door will close fairly quickly. Several factors are driving this consolidation, which will mark "the end of the beginning" for this industry. First, big and obvious segments such as the accommodations market, are already hotly competitive, with multiple companies battling for market share. Later entrants are exploring new ideas like sharing the right to park in front of someone's driveway during certain times of day. But these less-developed markets are often smaller, harder to penetrate or they pose more difficult legal and insurance challenges. 

The second issue—economies of scale—is a bit ironic: Collaborative consumption models reward certain kinds of scale even while punishing other kinds of scale. Collaborative consumption is the enemy of scale in the traditional sense of owning hotels or a fleet of cars. But it requires and rewards scale of a different kind: It's needed to build up a deep catalog of properties, cars, or service providers. It's needed to build up a large collection of credible peer reviews that build trust. It's needed to build world-class, reliable, and fast Web-based services.

For all these reasons the market will consolidate. Smaller companies will merge, be acquired, or fail. Leaders will expand across categories (housing, transportation, services, and more) just as Amazon has expanded well beyond its origins in bookselling. Innovative new services will solve the trust problem. The result will be a more productive, more sustainable, and more equitable economy.

  • Read James Rickards: The Internet, Obama's Stimulus, and When Government Spending Works
  • Check out Intelligence on Twitter at @EconomicIntel.
  • Check out U.S. News Weekly: an insider's guide to politics and policy.