How Firms Behave: A Case Study on the Sharing Economy
and Business Models Enabled by Zero Marginal Costs
Session 6 – Thinking Like an Economist – Prof. Carlos Serrano
OPENING STORY: WHAT IS THE SHARING ECONOMY?
WELCOME TO THE SHARING ECONOMY
A definition…
“(…) it is a disruptive economic form that unleashes new sources of supply. Whether this involves underused assets (private cars, spare bedrooms) or labor (people willing to fill in a few hours as taxi drivers, personal shoppers or couriers), it taps resources that could not be effectively organized before.”
LEARNING OBJECTIVES
WHAT WE AIM FOR IN THIS SESSION
At the end of the session, you should be able to…
Define the concept of the sharing economy
Describe the stakes involved, in particular in terms of business models
Apply it to a wide range of sectors, with a particular focus on Uber
Discuss If IMC≈0 for coordination gave us Uber, what does MC≈0 for intelligence give us?
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THE DISCUSSION
WELCOME TO THE SHARING ECONOMY
A definition…
“(…) it is a disruptive economic form that unleashes new sources of supply. Whether this involves underused assets (private cars, spare bedrooms) or labor (people willing to fill in a few hours as taxi drivers, personal shoppers or couriers), it taps resources that could not be effectively organized before.”
The expectation is that this new form:
.
WELCOME TO THE SHARING ECONOMY
A definition…
“(…) it is a disruptive economic form that unleashes new sources of supply. Whether this involves underused assets (private cars, spare bedrooms) or labor (people willing to fill in a few hours as taxi drivers, personal shoppers or couriers), it taps resources that could not be effectively organized before.”
The expectation is that this new form:
.
WELCOME TO THE SHARING ECONOMY
A definition…
“(…) it is a disruptive economic form that unleashes new sources of supply. Whether this involves underused assets (private cars, spare bedrooms) or labor (people willing to fill in a few hours as taxi drivers, personal shoppers or couriers), it taps resources that could not be effectively organized before.”
The expectation is that this new form:
.
WELCOME TO THE SHARING ECONOMY
A definition…
“(…) it is a disruptive economic form that unleashes new sources of supply. Whether this involves underused assets (private cars, spare bedrooms) or labor (people willing to fill in a few hours as taxi drivers, personal shoppers or couriers), it taps resources that could not be effectively organized before.”
The expectation is that this new form:
There is a direct relationship between costs and your business model potentially as a result.
Pinduoduo Inc. is the largest agriculture-focused technology platform in China. It connects farmers and distributors with consumers directly
The core of the Pinduoduo experience is team purchase, where buyers form a group in order to receive discounts from suppliers.
WELCOME TO THE SHARING ECONOMY
The promises of connectivity and coordination…
Think:
What is making this possible?
The internet pushed the marginal cost of distribution / coordination / transactions towards zero enabling platform businesses like Uber to scale insanely
THE MARGINAL COST MEANING
From Rifkin’s book
“Now, a formidable new technology infrastructure—the Internet of things (IoT)—is emerging with the potential of pushing large segments of economic life to near zero marginal cost in the years ahead. Rifkin describes how the Communication Internet is converging with a nascent Energy Internet and Logistics Internet to create a new technology platform that connects everything and everyone. Billions of sensors are being attached to natural resources, production lines, the electricity grid, logistics networks, recycling flows, and implanted in homes, offices, stores, vehicles, and even human beings, feeding Big Data into an IoT global neural network. Prosumers can connect to the network and use Big Data, analytics, and algorithms to accelerate efficiency, dramatically increase productivity, and lower the marginal cost of producing and sharing a wide range of products and services to near zero, just like they now do with information goods.”
THE MARGINAL COST MEANING
From Rifkin’s book
“The plummeting of marginal costs is spawning a hybrid economy—part capitalist market and part Collaborative Commons—with far reaching implications for society, according to Rifkin. Hundreds of millions of people are already transferring parts of their economic lives to the global Collaborative Commons. Prosumers are plugging into the fledgling IoT and making and sharing their own information, entertainment, green energy, and 3D-printed products at near zero marginal cost. They are also sharing cars, homes, clothes and other items via social media sites, rentals, redistribution clubs, and cooperatives at low or near zero marginal cost. Meanwhile, students are enrolling in free massive open online courses (MOOCs) that operate at near zero marginal cost. Social entrepreneurs are even bypassing the banking establishment and using crowdfunding to finance startup businesses as well as creating alternative currencies in the fledgling sharing economy. In this new world, social capital is as important as financial capital, access trumps ownership, sustainability supersedes consumerism, cooperation ousts competition, and “exchange value” in the capitalist marketplace is increasingly replaced by “sharable value” on the Collaborative Commons.”
These firms can become economically efficient because they can leverage huge network externalities that their business models are based on.
Source: Andrei Hagiu, “Strategic Decisions for Multisided Platforms,” MIT Sloan Management Review, December 2013 (http://bit.ly/2y9CH0f)
A feature of platforms is that they display networks externalities: the value a user derives from a good or service increases with the number of users.
In MSP, the value to customers on one side of a platform increases with the number of participating customers on another side.
E.g., Vélib, Android OS, AWS, Shopify, …
E.g., Gazelle, MyTheresa, …
E.g., Uber, AirBnB, Amazon Marketplace, Pin Duo Duo, Groupon
These firms can become economically efficient because they can leverage huge network externalities that their business models are based on.
BUT, can network effects alone guarantee high barriers to entry?
You also need high switching costs or high costs to belong to more than one competing network are also necessary!!!! (e.g., Groupon)
THE SPECIAL CASE OF UBER
LOOKING AT THE UBER ECONOMY
Changing the way the world moves?
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LOOKING AT THE UBER ECONOMY
Changing the way the world moves?
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LOOKING AT THE UBER ECONOMY
Changing the way the world moves?
Then came:
What is going on here?
Move fast, break things, expand…
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Source: https://on.ft.com/40IURzN
LOOKING AT THE UBER ECONOMY
Changing the way the world moves?
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WELCOME TO THE SHARING ECONOMY
A definition…
“(…) it is a disruptive economic form that unleashes new sources of supply. Whether this involves underused assets (private cars, spare bedrooms) or labor (people willing to fill in a few hours as taxi drivers, personal shoppers or couriers), it taps resources that could not be effectively organized before.”
The expectation is that this new form:
There is a direct relationship between cost and your business model potentially as a result.
LOOKING AT THE UBER ECONOMY
Changing the way the world moves?
Think what the Internet and MC = 0 did for Uber… Producing one extra ride does not cost Uber anything. BTW, does Uber own any cars?
This feature of marginal costs shapes the business model of the platform company.
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LOOKING AT THE UBER ECONOMY
Changing the way the world moves?
Think what the Internet and MC = 0 did for Uber
“The convenience, spontaneity, and efficiency afforded by UberCab was a revelation.”
“Uber was a remarkably easy service for customers to use.”
“What you are aiming for is the equilibrium of supply and demand. A perfect day is when you set an all-time record for trips per hour with zero surges.”
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LOOKING AT … AI TRANSFORMATION
Changing the way the world thinks?
3. If the internet drove the marginal cost of coordination toward zero, and that’s what made Uber possible, what happens when the marginal cost of intelligence approaches zero?
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LOOKING AT THE UBER ECONOMY
So why is it so hard to fight Uber?
“In reality, the legality of Uber’s business was unclear. Although laws existed to regulate the taxi and limousine industries, Uber’s service had unique characteristics that made comparison difficult. The fact was, the technology that was core to Uber’s network represented an unprecedented disruption that city and country regulators were ill equipped to deal with.”
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UBER IN THE SUMMER OF 2021… AND TODAY?
Where have all the Uber drivers gone?
Uber and other competitors struggled with supply and demand imbalances because of the coronavirus pandemic, leading to surge pricing and increased wait times.
Uber tweaked riders’ incentive scheme and raised pay to bring them back to the road. Having drivers is key to ridesharing platforms. Their core business is connecting drivers with riders. If there are no drivers, there is no business!
In earnings calls in summer 2021, Uber said it had moved past its driver shortages that hampered its recovery in the early days following the lifting of Covid-19 restrictions
And today, what about switching costs? How can they raise them?
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Source: https://on.ft.com/40IURzN
UBER IN THE SUMMER OF 2021… AND TODAY?
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For riders: Loyalty programs, integrated services
For drivers: Earning incentives, technology,
HOW COULD THIS END UP ON THE FINAL TEST
LOOKING AT THE UBER ECONOMY AND AI TRANSFORMATION
Changing the way the world moves?
3. If the internet drove the marginal cost of coordination toward zero, and that’s what made Uber possible, what happens when the marginal cost of intelligence approaches zero?
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KEY TAKE-AWAYS
WHAT WE AIM FOR IN THIS SESSION
At the end of the session, you should be able to…
Define the concept of the sharing economy
Describe the stakes involved, in particular in terms of business models
Apply it to a wide range of sectors, with a particular focus on Uber
Discuss If IMC≈0 for coordination gave us Uber, what does MC≈0 for intelligence give us?
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