Assume that you are the economist appointed by the ACCC to conduct an enquiry into how the emergence of sharing economy in the context of Uber and other ride sharing services such as Ola and Taxify is going to impact taxi markets in Australia. You are required to write a report on what are sharing economies and its effects on consumers, producers and the society. In doing so, you should address the following topics:
1. Provide a brief review of the academic literature on sharing economy (across the world). (Note: Here you need to discuss the academic literature published as working papers or in academic journals. Blogs and websites do not count as academic literature and should only be cited as examples at most.)
2. What are some of the challenges faced by the consumers? Provide an explanation with reference to microeconomic theory.
3. What are the challenges faced by suppliers of ride share services and traditional taxi markets? Would these companies engage in price competition? Provide an explanation with reference to microeconomic theory.
4. What would be the role of the ACCC in the market and how should it work? Provide an explanation with reference to microeconomic theory.
5. Based on your research, what is/are your recommendation/s to the ACCC? Ensure that you refer to I.O. concepts and models in your response.
Effects of Sharing Economy on Hospitality Industry
In this article, the authors examined the effects of inhibiting, motivating and technological factors of the users participating in the sharing economy. The study used a self- reported online survey among uber users in Hong Kong to determine its findings. From 295 users and use of structural equation modeling technique, the research found out the perceived risks and benefits, trust in the platform and platform qualities which supported user’s intention to use Uber. The results from the study showed that the perceived benefits are the ones which have the strongest influence on the user’s intention of participating in the sharing economy. It also found out that the demographic variables that is age, gender and education level have no significant effects on the user’s intention to participate in Uber.
This article aims to look at the impact of the rise of the sharing economy especially in short term rentals has on the hospitality industry by considering AirBnB. According to the study, the penetration of AirBnB is negatively correlated to hotel revenues where the lower end hotels incur the most financial impact. This article focused on the role of the shared economy on the traditional forms of the economy and revealed that the sharing economy platforms were indeed disruptive of the normal economy.
The sharing economy is a model which facilitates acquisition and provision or sharing access to goods and services through the use of a community-based platform. One of the companies that works with this business model is Uber where it involves one using the application to access taxi drivers. Compared to the traditional taxi business model, it is more convenient to consumers and allows transparency in terms of the pricing as well as location. Since it provides a new model of an existing business, it provides some level of competition to the already existing traditional taxis. There are challenges experienced by both the consumers and producers as a result of this new disruptive technology. Some include security and privacy risks an some include price levels which are uncompetitive. It would be useful to have an institution with oversight in the market to facilitate sufficient levels of competition in the market to protect both the consumers and the service providers.
This article shows the role of disruptive technologies such as cab hailing apps on the economy. It argues that in the respective industries, the market inefficiencies contributed to the underutilization of the resources in those markets. The applications have since tried at effectively connecting the users to the resources leading to more efficiency in the market. Further the apps have reinforced the consumers ability to make choice over a particular product or service, Additionally, the article points out the reduction of transaction costs as a result of the business models which use the disruptive technologies such as the use of already available cars instead of purchasing new ones as in the cab hailing applications. Also through allowing collaborative consumption there is more efficient use of resources which have otherwise been underutilized.
Challenges Faced by Consumers in Sharing Economy Market
This research looks at how Uber particularly transformed the traditional taxi industry particularly in New York. The study used a time series regression model to evaluate the data and found out that there was no evidence to show that uber usage has decreased since the company entered the market. However, the study observed that taxi drivers have been made to change their way of doing business in order to maintain their market position. The traditional taxis have ben forced to serve customers outside the areas where uber is more prevalent. This model has allowed the drivers to look for customers in areas which were previously ignored leading to more consumer satisfaction in those areas. It has also allowed the drivers to retain the number of trips despite the disruptive technology. The findings from the research show that the taxi drivers responded to the threat of Uber’s entry and have provided substantial benefits to consumers by widening the areas from which they can be hailed from. The sharing economy can be seen to have transformed the existing market in a positive and welfare enhancing way (Cusumano, 2015)..
What are some of the challenges faced by the consumers? Provide an explanation with reference to microeconomic theory.
One of the challenges experienced by consumers is privacy risk where private and personal information is collected and used by the sharing economy service providers. The sharing economy is reliant on inputs of detailed personal information and the internet-based companies have often used these pieces of information to realize additional economic gains. For instance, the cab hailing applications rely on the use of location based online services and other personal information which increases privacy risk and may negatively influence the user’s readiness to participate in the sharing economy (Cohen & Kietzmann, 2014).
Another challenge is security risk where the user of the service is exposed to potential harm from the circumstance created by the sharing economy. While the service is managed by an application, both the consumer and the service provider are strangers and therefore it is as though the consumer has entered a stranger’s car. The consumer is therefore exposed to security risk in case the driver is not of reputable persona. Also, the security risk arises when the consumer inputs banking information in the application which could result to financial loss. Further, some of the drivers may not be adequately insured or have their vehicles in good condition which may lead to loss on the consumer side. This aspect may also deter consumers from fully participating in the sharing economy.
Effects of Sharing Economy on Traditional Taxis
Also, in the case of surges, the consumer is faced with price increases which may reduce their consumer surplus. In the case of sharing economy, the consumer has little or no say in the price determination of the use of the service. The user has low negotiation power and therefore is susceptible to price changes while using the sharing economy services.
What are the challenges faced by suppliers of ride share services and traditional taxi markets? Would these companies engage in price competition? Provide an explanation with reference to microeconomic theory.
In the case of the suppliers of the ride share services, they have lower producer surplus. This is because the ride share applications have a base rate for every ride based on the time or the distance from the pick up location, the driver of the car also has little negotiating power since the prices have already been set. Also, the driver has limited profits since some of the money from the ride is paid back to the application (Martin, 2016).
In the case of the traditional taxi markets, they face a challenge of having less consumers since convenience of the ride share services allow more people to subscribe to them compared to the traditional taxi markets. Additionally, they also create a scenario where the traditional taxi markets are forced to decrease their prices in order to match the prices are provided by the ride share services since the demand for the traditional taxi has gone down.
These two companies can engage in price competition though the traditional taxi markets will be set to lose given if their prices are higher than the ride share services, less people will prescribe to them.
What would be the role of the ACCC in the market and how should it work? Provide an explanation with reference to microeconomic theory.
The role of the ACCC is to promote competition and fair trade in markets to benefit consumers, businesses and the community. It is also the role of the ACCC to ensure that individuals and businesses comply with the Australian competition, fair trading and consumer protection laws.
In the case of ride share economy, it would be the role of the ACCC to provide oversight in terms of the pricing of the services to ensure that the consumers are protected. One of these ways would be to protect consumers against collusion by the ride sharing services and the traditional taxis (Heinrichs, 2013). Collusion would mean that both services will increase the prices far above market equilibrium and therefore experience a reduction in their welfare through a reduction in their consumer surplus. In the case of competition between the traditional taxi and the ride sharing apps, the ACCC can provide oversight in terms of ensuring that the prices set by the app are not so low such that the traditional taxi drivers cannot compete adequately since if they were to set a similar price they would not be able to sufficiently cover their costs. In that way, the traditional taxis will also have a portion in the market as well as be allowed to compete in the market. Otherwise, the rideshare apps may become a monopoly and set predatory prices which may affect the consumers further (Kin & Lee, 2018).
However, the ACCC should not result to the use of price ceilings or price floors. In the case of a price ceiling, the prices may be too low for the traditional taxis to match given their value proposition. While it may be favorable for the ride share app since they have economies of scale in operation, it may reduce the amount of market power of the traditional taxi providers. Also, if set too low, it may make the ride share providers to exit the market. In the case of a price floor, the prices set may be too high for the consumers and therefore may affect their welfare though a lower consumer surplus (Zervas & Byers, 2017).
Based on your research, what is/are your recommendation/s to the ACCC? Ensure that you refer to I.O. concepts and models in your response.
The ACCC should advice on the base price for both the ride share apps and the traditional taxi drivers. They could use the demand and supply curve to come up with a price estimate by which both service providers can vier off by certain margins. In this way, both the consumer and service providers are protected from prices which may be too exploitative for either party (Hamari & Ukknen, 2016).
Cohen, B., & Kietzmann, J. (2014). Ride on! Mobility business models for the sharing economy. Organization & Environment, 27(3), 279-296.
Cusumano, M. A. (2015). How traditional firms must compete in the sharing economy. Communications of the ACM, 58(1), 32-34.
Hamari, J., Sjöklint, M., & Ukkonen, A. (2016). The sharing economy: Why people participate in collaborative consumption. Journal of the association for information science and technology, 67(9), 2047-2059.
Heinrichs, H. (2013). Sharing economy: a potential new pathway to sustainability. GAIA-Ecological Perspectives for Science and Society, 22(4), 228-231.
Kim, K., Baek, C., & Lee, J. D. (2018). Creative destruction of the sharing economy in action: The case of Uber. Transportation Research Part A: Policy and Practice, 110, 118-127.
Martin, C. J. (2016). The sharing economy: A pathway to sustainability or a nightmarish form of neoliberal capitalism?. Ecological economics, 121, 149-159.
Zervas, G., Proserpio, D., & Byers, J. W. (2017). The rise of the sharing economy: Estimating the impact of Airbnb on the hotel industry. Journal of Marketing Research, 54(5), 687-705.
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