How to Pluck the Fruits of the Sharing Economy?

16639834358_980fce055b_k_1
Creative Commons

What is a “sharing” or (as it is sometimes referred to) a “collaborative” economy? It is a rapidly rising business model which enables online trade in goods and services. For example, Lithuanians already enjoy ride-sharing platform Uber, P2P lending platforms such as Savy or Finbee, borrow things from each other on dalinuosi.lt and rent out their homes on Airbnb. Such businesses constitute a tripartite agreement between a buyer, a seller and a platform operator, serving as an intermediate between the former. The platform itself serves as a cyber bazaar for it allows communication, transactions and feedback exchange between the people involved. And it is turning an avalanche of success.

Last year alone the European sharing economy generated over EUR 28 billion in revenue and this is only a tiny fraction of what may be expected in the future as in 2015 five major fields of the sharing economy (accommodation, transportation, daily services, professional services and finances) doubled in revenue as compared to 2014. Moreover, if used to its full potential, the European sharing economy is estimated to account for as much as EUR 572 billion each year.

Given this huge untapped potential, the European Commission has issued guidelines on dealing with the rise of a collaborative economy-based business model so that its development is used to a maximum benefit. The Commission encourages member states to take a flexible approach towards the sharing economy, meaning that no restrictive regulatory measures such as licensing should be taken unless there is no other way of protecting public interest, not to mention extreme measures such as absolute restrictions. But the more popular these new business models get, the stronger opposition they face as traditional businesses are being pushed out of markets. This creates a puzzle for local governments. How about Uber’s success in Europe? Let’s take France as an example.

Indeed, nothing compares to the levels of absurdity of historical taxi regulation in France. Back in 1937 the local government of Paris fixed the maximum number of taxi cars in the city to 14,000. Since then, the number of inhabitants has more than doubled (from 5.7 to 12.2 million), whereas the number of taxi licences has only been increased to a mere total of 18,000. As a result, licence prices skyrocketed and today a single license costs up to EUR 250,000. License owners have an interest in maintaining relatively small number of highly priced licenses, because they see them as an investment. Older taxi drivers are selling their licences to make enough money for retirement, whereas new drivers fall in debt whenever they want to take up this business.

Uber’s arrival shocked the market just in a couple of years taxi revenue has dropped by 30-40%, forcing taxi drivers to go out into streets and protest against this new market player. Unfortunately, due to a huge pressure from taxi lobbyists, ignorance prevailed over consumer benefit and a ban on providing Uber services followed. As a result, new drivers are still forced to overpay for licences the same way as the customers are overpaying for their services.

Therefore France is facing yet another challenge. The European Commission clearly stated that a restrictive regulatory approach that they have implemented must be avoided. A difficult road is ahead for the French government as it will have to admit that the country’s licensing practices are laughably outdated and have to be removed.

If the market entry prices were not as astronomical as they are now, taxi drivers could simply shift to Uber. This has already happened in Vilnius, Lithuania, where both average drivers and some of the traditional taxi drivers have moved to ride-sharing platforms. However, other sharing-economy sectors in Lithuania have somewhat different experience from the transportation sector. Let’s take P2P lending – digital platforms where people lend each other money.

Even though the concept is that two independent people lend each other money, this activity is regulated similarly as payday loans. Same advertising restrictions apply – a lender cannot issue a credit larger than EUR 500 and a borrower cannot receive more than EUR 5,000 per year. These restrictions limit investment possibilities.

The European Commission is paving a way for the development of the sharing economy. Cheaper and more flexible ways to make money and provide services have shown that traditional businesses are often shackled and are so rigid due to legal requirements. That is why flexibility is the key to modern economy. It brings more affordable goods and services to customers.

There are two ways. The first one is to oppose the change and drag in the back of a storming locomotive of the new economy. The second is to use the opportunities provided by new technologies. The simplicity and flexibility is what economy needs for human entrepreneurship to blossom.

Dominykas Sumskis
avatar