In Shanghai, a driver logs in to an online forum, looking for someone to pretend to want a ride. He finds a willing taker. He pretends to collect the customer and drop her at the airport; in fact, they never meet. Then he goes online and sends her money. The fee they’ve agreed on is about $1.60.
Or perhaps the driver goes a step further, making up not just the journey but also the other person. He goes to the online marketplace Taobao and buys a hacked smartphone. That enables him to create multiple fake identities; he uses one to arrange a ride with himself.1
Why is he doing this? Because he’s willing to run the risk of being caught—and because someone’s willing to pay him to give people rides in his car. Investors have run up billions of dollars of losses—in China, and elsewhere—paying people to share car journeys. Naturally, they’re trying to stamp out the imaginary journeys; but subsidizing genuine rides? They’re convinced that’s a smart idea.
This all seems bizarre—perverse, even. But everyone involved is rationally pursuing economic incentives. To see what’s going on, we have to understand a phenomenon that’s spawned many buzzwords: “crowd-based capitalism,” “collaborative consumption,” “the sharing economy,” “the trust economy.”
Here’s the basic idea. Suppose I’m about to drive myself from downtown Shanghai to the airport. I occupy only one seat in my car. Now suppose that you live a block away and you also need to catch a flight. Why don’t I give you a lift? You could pay me a modest sum, less than you’d pay for some other mode of transport. You’re better off. So am I—after all, I was driving to the airport anyway.
There are two big reasons this might not happen. The first, and most obvious, is if neither of us knows the other exists. Until recently, the only way you could advertise your desire for a lift would be to stand at an intersection and hold up a sign saying “airport.” It’s not very practical—especially since you’re under time constraints: the plane won’t wait for you.
Other transactions are even more niche. Say I’m working at home and my dog is nuzzling my leg, his leash in his mouth, desperate for a walk. But I’m behind on a deadline and can’t spare the time. You, meanwhile, live nearby. You like dogs and walking, and you have a free hour. You’d love to earn a few bucks by walking my dog, and I’d love to pay you. How do we find each other? We don’t—unless we have some kind of online platform, something like TaskRabbit, or Rover.
This function of matching people who have coincidental wants is among the most powerful ways the Internet is reshaping the economy. Traditional markets work perfectly well for some goods and services, but they’re less useful when the goods and services are urgent or obscure.
Consider the plight of Mark Fraser. It was 1995. Mark Fraser gave lots of presentations, and he really wanted a laser pointer—they were new, and cool, but also forbiddingly expensive. Fraser, however, was an electronics geek. He was confident that if he could get his hands on a broken laser pointer, he could repair it cheaply.2 But where on earth would he find a broken laser pointer? The answer, now, is obvious—try Taobao, or Craigslist, or eBay. Back then, eBay had only just started. Its very first sale: Mark Fraser bought a broken laser pointer.
Mark Fraser was taking a bit of a risk. He didn’t know the seller; he simply had to trust that she wouldn’t simply pocket his $14.83 and then disappear without sending him the laser pointer he’d bought.
For other transactions, the stakes are higher. That’s the second reason I might not give you a lift to Shanghai airport. I see you at the intersection holding your sign, but I’ve no idea who you are. Perhaps you’re intending to attack me and steal my car. You might doubt my motives, too—perhaps I’m a serial killer.
That’s not a completely ridiculous concern: hitchhiking was a popular pursuit a few decades ago, but after some sensationally publicized murders, it fell out of fashion.3
Trust is an essential component of markets—it’s so essential that we often don’t even notice it, as a fish doesn’t notice water. In developed economies, enablers of trust are everywhere: brands, money-back guarantees, and of course repeat transactions with a seller who can be easily located.
But the new sharing economy lacks those enablers. Why should we get into a stranger’s car—or buy a stranger’s laser pointer? In 1997, eBay introduced a feature that helped solve the problem: Seller Feedback.
Jim Griffith was eBay’s first customer service representative. At the time, he says, no one “had ever seen anything like [it].” The idea of both parties rating each other after a transaction has now become ubiquitous. You buy something online—you rate the seller; the seller rates you. You use a ride-sharing service such as Uber—you rate the driver; the driver rates you. You stay in an Airbnb—you rate the host; the host rates you. Analysts such as Rachel Botsman reckon the “reputation capital” we build on such websites will eventually become more important than credit scores. Possibly; these systems aren’t bulletproof. But they achieve a crucial basic job: they help people overcome natural caution.
A few positive reviews set our mind at ease about a stranger. Jim Griffith says of Seller Feedback, “I’m not so sure [eBay] would have grown without it.”4 Online matching platforms would still exist, of course—eBay already did—but perhaps they’d be more like hitchhiking today: a niche pursuit for the unusually adventurous, not a mainstream activity that’s transforming whole sectors of the economy.
Platforms such as Uber, Airbnb, eBay, and TaskRabbit create real value. They tap into capacity that would have gone to waste: a spare room, a spare hour, a spare car seat. They help cities be flexible when there are peaks in demand: I might let out a room only occasionally, when some big event means the price is high.
But there are losers. For all the touchy-feeliness of the buzzwords—“collaborative,” “sharing,” “trust”—these models aren’t all about heartwarming stories of neighbors coming together to borrow one another’s power drills. They can easily lead to cutthroat capitalism. Established hotels and taxi companies are aghast at competition from Airbnb and Uber. Is that just an incumbent trying to suppress competition? Or are they right when they complain that the new platforms are ignoring important regulations?
Many countries have rules to protect workers, like guaranteed hours or working conditions or a minimum wage. And many people on platforms such as Uber aren’t just monetizing spare capacity, they’re trying to make a living without the protections of a formal job, perhaps because Uber competed them out of a job.
Some regulations protect customers, too—for example, from discrimination. Hotels can’t legally refuse you a room if you’re, say, a same-sex couple. But hosts on Airbnb can choose to turn you down as a guest after seeing not just your feedback but your photos. Airbnb builds trust by bigging-up the personal connection, and that means showing people prominent pictures of who they’re dealing with. It also enables people to act on their personal prejudices, consciously or otherwise. People from ethnic minorities have been proven to suffer as a result.5 How online matching platforms should be regulated is a dilemma causing lawmakers around the world to scratch their heads.
It matters because it’s potentially huge business, especially in emerging markets where there isn’t yet a culture of owning things like cars. And it’s a business with network effects: the more people use a platform, the more attractive it becomes. That’s why Uber and its rivals—Didi Chuxing in China, Grab in Southeast Asia, Ola in India—have invested massively in subsidizing rides and giving credits to new customers: they wanted to get big first.
And, naturally, some drivers have been tempted to defraud them. Remember how they did it? By using an online forum to find a willing fake customer, or an online marketplace to buy a hacked smartphone. Matching people with particular wants really is useful.