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THOMAS A. WEBER

THOMAS A. WEBER. ESRC Seminar Series on Collaborative Housing and Community Resilience University of Newcastle December 11, 2014 Chair of Operations, Economics and Strategy Management of Technology and Entrepreneurship Institute. AGENDA. Collaborative Consumption

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THOMAS A. WEBER

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  1. THOMAS A. WEBER ESRC Seminar Series on Collaborative Housing and Community Resilience University of Newcastle December 11, 2014 Chair of Operations, Economics and Strategy Management of Technology and Entrepreneurship Institute

  2. AGENDA Collaborative Consumption A Model of Collaborative Housing with Intermediary Incentives for Ownership The Future of Sharing Markets Conclusion

  3. COLLABORATIVE HOUSING: THE IDEA IS SIMPLE Intermediation and Collaborative Consumption

  4. WHY NOT RENT OUT YOUR HOUSE?Almost No Private Short-Term Rentals before AirBNB Moral Hazard! Intermediation and Collaborative Consumption

  5. INTERMEDIATED HOUSING TRANSACTIONS AVAILABLE Intermediation and Collaborative Consumption

  6. BIGGER THEME: COLLABORATIVE CONSUMPTION (…) Intermediation and Collaborative Consumption

  7. COLLABORATIVE HOUSING: THE MAIN PLAYERS Source: Google Trends. Intermediation and Collaborative Consumption

  8. COLLABORATIVE HOUSING HAS MANY DRIVERSCommon Theme: “Gains From Trade” “Host Impacts” Source: HR&A, “AirBnB: Economic Impacts in San Francisco and its Neighborhoods,” Findings Report Preview, Nov. 2012. Intermediation and Collaborative Consumption

  9. POTENTIAL PENETRATION IS DEEPExample: San Francisco Source: HR&A, “AirBnB: Economic Impacts in San Francisco and its Neighborhoods,” Findings Report Preview, Nov. 2012. Intermediation and Collaborative Consumption

  10. VALUE GENERATED FOR HOSTS AND CONSUMERSExtra Rent and Extra Utility Source: HR&A, “AirBnB: Economic Impacts in San Francisco and its Neighborhoods,” Findings Report Preview, Nov. 2012. Intermediation and Collaborative Consumption

  11. AGENDA Collaborative Consumption A Model of Collaborative Housing with Intermediary Incentives for Ownership The Future of Sharing Markets Conclusion

  12. A SIMPLE MODEL OF A DIFFERENTIATED SHARING MARKET WITH INTERMEDIARY • Hosts: 2 types, with qualities qi (i = 1,2), that are mean-preserving spread of hotel (q0) • Renters: Continuum, with heterogeneous marginal utility for quality of accommodation • Intermediary: offers matching service and insurance against moral hazard • Enables matching probabilityb (exogenous) • Charges commission rate h to host i based on posted price pi • Charges commission rate r to guest (renter) of host i based on pi • Asks for fixed deposit f (from renter), deductible d (from host, in case of damage), and surcharge rate s (from renter, in case of damage) • The probability of damage (1-z) is controlled by renter’s effort e • The extent of the damage (x), if it occurs, follows a Pareto distribution (for sake of concreteness) Intermediation and Collaborative Consumption

  13. TIMELINE Intermediation and Collaborative Consumption

  14. TIMELINE (CON’D) • t = 0: Hotel (= outside option for consumers) sets price (p0) • t = 1: Intermediary specifies rate structure (h,r) and insurance terms (H,R) (resp. (d,f,s)) • t = 2: Hosts decide (noncooperatively) about their posted prices p1 and p2, given p0 and given all the quality levels (q0, q1, q2) • t = 3: Consumers choose their respective accommodations • t = 4: Consumers learn about their effort cost and then choose their respective effort levels Marginal types: Firm profits: Intermediation and Collaborative Consumption

  15. LAYER 1: RENTAL TRANSACTIONS Intermediation and Collaborative Consumption

  16. LAYER 2: MORAL HAZARD Intermediation and Collaborative Consumption

  17. LAYERS 1 + 2 = INTERMEDIATED COLLABORATIVE HOUSING Intermediation and Collaborative Consumption

  18. EXAMPLE: PARETO LOSS DISTRIBUTION (“THICK TAIL”) (m) Expectation: m = m k/(k-1) m: minimum damage Intermediation and Collaborative Consumption

  19. CAPITAL AT RISK FOR INTERMEDIARY Intermediation and Collaborative Consumption

  20. ELIMINATION OF MORAL HAZARD: THREE REQUIREMENTS Intermediation and Collaborative Consumption

  21. SOLVING THE INSURANCE PROBLEM Intermediation and Collaborative Consumption

  22. SOLVING THE INSURANCE PROBLEM (CONT’D) Hosts should not contribute to damage; they may be even overcompensated. Intermediation and Collaborative Consumption

  23. OPTIMAL INCENTIVE CONTRACT: COMPLETE INSURANCE Intermediation and Collaborative Consumption

  24. LIABILITY IS SPLIT AMONG HOST, RENTER, AND INTERMEDIARYAt Optimum: Intermediary’s Expected Liability is Zero Intermediation and Collaborative Consumption

  25. OPTIMAL SPLIT OF LIABILITY Intermediation and Collaborative Consumption

  26. THE HOSTS’ PRICING GAME Intermediation and Collaborative Consumption

  27. PRICES OF SHARED GOODS Intermediation and Collaborative Consumption

  28. QUALITY AND AVAILABILITY OF SHARED GOODS Intermediation and Collaborative Consumption

  29. PRICING THE OUTSIDE OPTION: HOTEL ECONOMICS Coexistence with shared shared housing in interest of hotels (undercutting the shared options is suboptimal) Intermediation and Collaborative Consumption

  30. OPTIMAL RENT EXTRACTION (INTERMEDIARY ECONOMICS) Intermediation and Collaborative Consumption

  31. RENT EXTRACTION CAPABILITY DEPENDS ON MATCHING IMPROVEMENT The more the intermediary improves the matching of individuals in the shared housing market, the higher the commission rates. Intermediation and Collaborative Consumption

  32. AVAILABILITY OF COLLABORATIVE OPTIONS DEPENDS ON AGENCY COST OF SHARING Intermediation and Collaborative Consumption

  33. MARKET PRICES OF COLLABORATIVE OPTIONS DEPEND ON AGENCY COST OF SHARING Intermediation and Collaborative Consumption

  34. INDUSTRY PROFITS AS A FUNCTION OF AGENCY COST Intermediation and Collaborative Consumption

  35. INSIGHTS FROM SIMPLE MODEL • Simple framework for systematic discussion of the business impacts of decisions • Model can be calibrated and used as a basis for detailed business simulation Specific points: • Almost full surplus extraction possible for intermediary • Prices independent of commission structure (consumers unaffected) • Moral hazard problem can be eliminated (using surcharge model) • Matching probability improvements increase surplus Intermediation and Collaborative Consumption

  36. … AND MORE GENERALLY • Coexistence: convential accommodation and shared housing robustly coexist (especially high-quality shared accommodation) • The moral-hazard problem can be overcome by a trusted intermediary • The intermediary is viable (provided a sufficiently low fixed cost) • Consumers benefit from shared housing because prices decrease overall Intermediation and Collaborative Consumption

  37. PRIVATE TRANSACTIONS REMAIN RISKY… Not (Yet?) Ready to Become Fully Mainstream Intermediation and Collaborative Consumption

  38. AGENDA Collaborative Consumption A Model of Collaborative Housing with Intermediary Incentives for Ownership The Future of Sharing Markets Conclusion

  39. OWNERSHIP INCENTIVES DEPEND ON CURRENT NEED AND LIKELIHOOD OF NEED IN THE FUTURE (Prob. of need) Intermediation and Collaborative Consumption

  40. SHARING MARKET, IF IT CLEARS (Prob. of need) Intermediation and Collaborative Consumption

  41. DECISION MAKING PROCESS: NON-OWNER Intermediation and Collaborative Consumption

  42. DECISION MAKING PROCESS: OWNER Intermediation and Collaborative Consumption

  43. INSIGHTS FROM SIMPLE MODEL • Sharing markets provide mutual insurance • In the short run, sharing markets may not easily clear • Impact of sharing markets on ownership incentives is ambiguous Intermediation and Collaborative Consumption

  44. AGENDA Collaborative Consumption A Model of Collaborative Housing with Intermediary Incentives for Ownership The Future of Sharing Markets Conclusion

  45. STANDARD TECHNOLOGY ADOPTION PATH Introduction  Growth  Maturity  Decline Installed Base I II III IV Time Intermediation and Collaborative Consumption

  46. SHARED CONSUMPTION ADOPTION • Initialization • Technological feasibility • Critical mass of systems in place • Innovation/entrepreneurial effort as trigger • Growth • Change in consumer behavior • Social adoption • Regulatory Response • Competitors appeal to regulator • Externalities trigger court action • Pareto-dominated outcome • Policy Resistance • Inertia: Change in consumer behavior difficult to reverse • Massive civic disobedience • Settlement • Coexistence and agreements • Pareto efficiency (e.g., negotiated transfers or new markets) • Stabilization in form of new social norms Intermediation and Collaborative Consumption

  47. SHARED CONSUMPTION ADOPTION Initialization  Growth  Regulatory Response  Policy Resistance  Settlement Installed Base V I II III IV Time Intermediation and Collaborative Consumption

  48. SHARED CONSUMPTION ADOPTION (CONT’D) • Initialization • Technological feasibility • Critical mass of systems in place • Innovation/entrepreneurial effort as trigger • Growth • Change in consumer behavior • Social adoption • Regulatory Response • Competitors appeal to regulator • Externalities trigger court action • Pareto-dominated outcome • Policy Resistance • Inertia: Change in consumer behavior difficult to reverse • Massive civic disobedience • Settlement • Coexistence and agreements • Pareto efficiency (e.g., negotiated transfers or new markets) • Stabilization in form of new social norms Entrepreneurship Exploration Start of Adjustment Normalization End of Adjustment Intermediation and Collaborative Consumption

  49. IMPACT OF SHARING MARKETS: ECONOMIC AND SOCIAL Economic Social • Increased market participation • More Hedging(co-insurance vs. moralhazard) • Changed ownership incentives • Long-run normalizationof surplus • Gains from trade andchange in local economies • Behavioral changes: Increased transience • Higher importanceof social networks andreputation systems • Adaptation Intermediation and Collaborative Consumption

  50. AGENDA Collaborative Consumption A Model of Collaborative Housing with Intermediary Incentives for Ownership The Future of Sharing Markets Conclusion

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