CHAPTER 8 Gains from Trade
Why stay in a hotel when you can rent someone’s treehouse for the weekend?
Airbnb has done something extraordinary. If you’ve got a spare room, or if you’re not using your house for a weekend, you can post a few photos on their website, and with any luck, you’ll find someone who wants to rent it. And if you’re traveling, you can find a vast array of bedrooms, houses, and even houseboats, castles, and treehouses to rent.
All those spare rooms and houses always existed, but they weren’t previously being supplied to a rental market. Airbnb has persuaded homeowners to become suppliers in a new market for short-term accommodation. Similarly, travelers have always visited new cities, but they used to stay in hotels. Airbnb has also convinced travelers to forgo hotels to become buyers in the market for short-term accomodations in people’s homes. By creating a new market, Airbnb has created new possibilities.
As a result, there are honeymooners staying in a castle in the French countryside, tourists living in a clocktower in London, a family enjoying a week in a treehouse, and a twenty-something at a conference staying with two aspiring Broadway actors in New York. None of these folks knew each other last week, yet today they’re sending each other money and staying in each other’s homes. And they’re all enjoying gains from trade: The travelers gain an interesting place to stay, and their hosts gain a welcome boost to their incomes.
The true star of this story is not Airbnb’s management, but the market that Airbnb has created. It brings together different people, in different places, each with different needs and different assets. The market coordinates all of this activity, allocating the honeymooners to the castle and the family to the treehouse.
This story is not unique. Far from it. Markets are everywhere. You interact with them so often that sometimes you forget how pervasive they are. Indeed, markets are arguably the dominant force organizing our lives today.
And so in this chapter, we ask: What do markets do for us? The key idea is that markets are all about harvesting the gains from trade that make each of us better off. We’ll begin by describing gains from trade. Then we’ll see how comparative advantage generates these gains. And finally, we’ll explore the key role that prices play in coordinating economic activity, and how managers can harness market forces to make better choices. Let’s get started.