A Role for Online Platforms in the Future Economy

By Anders Fremstad, Ph.D. candidate in economics at the University of Massachusetts Amherst and researcher with E3 Network’s Future Economy Initiative. Anders’ current research focuses on the economics of cooperation and the sharing economy.

The “sharing economy”, which is receiving a lot of attention, is built on a simple technology: online platforms. The internet makes it easier for people to buy a used couch, borrow a power drill, or find a place to spend the night. In economic terms, online platforms reduce the transaction cost of borrowing, lending, buying, selling, and giving stuff. This future economy innovation allows people to better allocate durable goods, so that they flow more freely from people who aren’t using them to people who could put them to use.

There is little data on the economic, social, and environmental impacts of the sharing economy, but established platforms have already transformed the way people consume some goods. Consider Craigslist’s impact on the market for secondhand goods. Craig Newmark first launched Craigslist in San Francisco in 1995, and the website now serves hundreds of locations and the vast majority of Americans. Craigslist changed the way people find jobs and apartments, but its greatest impact has probably on how people buy, sell, and give away used items.

According to a new survey by the Center for the New American Dream, 54 percent of Americans have used Craigslist or a similar online market for secondhand goods. This year Americans will create about half a billion posts in the for-sale section of Craigslist. The economic and environmental benefits of these posts are not entirely clear, but they are not small. My research suggests that Craigslist may divert a million tons of waste from landfills each year. Meanwhile, the economic benefits from Craigslist probably flow disproportionately to low-income people, who are more likely to buy and sell used items.

The success of Craigslist may stem from the fact that it facilitates a familiar type of transaction. Before Craigslist, people bought used cars from strangers using the classified ads in newspapers. Craigslist just made it easier for people to search a broader array of ads (with detailed descriptions and pictures) to buy a used couch, a microwave, or a bicycle.

More recent online platforms use reputation systems to facilitate other forms of sharing. For example, Couchsurfing helps travelers find members who will host them on a couch (or in a spare room). The online hospitality network allows hosts and “surfers” to rate one another, which gives members an incentive to share nicely and maintain their online reputations. By incorporating online reputations, Couchsurfing expands the circle of family and friends with whom people already share lodging.

According to the survey from the Center for the New American Dream, about 10 percent of Americans have used a peer-to-peer lodging service like Airbnb or Couchsurfing. Couchsurfing alone boasts 9 million members worldwide, and the platform has provided members with millions of nights of free lodging. The service has probably saved travelers hundreds of millions of dollars in hotel costs, but the main benefit of travelling on Couchsurfing is meeting local people and exploring a new place from their perspective. And, as others have noted, there are clear environmental benefits to putting spare rooms to use rather than building more hotels.

The economic, social, and environmental benefits of online platforms will probably increase over time. Even a successful platform like Craigslist has room to grow. After all, nearly half of Americans have yet to adopt it. Then there are all the new platforms that facilitate other forms of sharing. It isn’t so hard to imagine Americans sharing tools on NeighborGoods, renting underused cars on RelayRides, and arranging carpools on Blablacar.

However, this doesn’t mean that we should sit back and wait for the sharing economy to work its magic. Smart government policies are needed to keep for-profit companies in check. In some cases, governments should prevent sharing economy companies from facilitating transactions that provide no benefit to society at large. We also need values that are more conducive to sharing. For example, we could develop norms for selling or giving away used goods in the same way we promoted norms for recycling bottles and cans. The first step, though, is recognizing that online platforms can help us build a better economy – by expanding access to goods, building community, and protecting environmental resources.

For more information on E3 Network’s Future Economy Initiative, view our framework. Studies to be completed in December, 2015.