Implications of Collaborative Consumption

Implications of Collaborative Consumption Table of Contents (Jump to) Abstract: Introduction Literature Review Short term Implications The Zero Marginal Cost Theory Long term Implication of Collaborative Consumption: Case Peer to Peer Ride Sharing Implication of Hyper-Consumption on Environmental Sustainability and GDP: Discussion of Result Conclusion Reference Abstract: Collaborative consumption also known as â€Å"Sharing economy† is disrupting long-held ideas about ownership, generating extra revenue streams for people while reducing demand for materials through lending, trading, renting, gifting, bartering, swapping and sharing through technology and peer to peer communities. With the leadership of innovators like Kickstarter and Airbnb, we are finally realizing that there is no real advantage to possessing more things, when we can still have access to stuff that we need or the experiences we crave. Most economists believe that collaborative consumption is the zeitgeist of future, and an innovative socio-economic approach to transforming the way we live. While all these initiatives have led to several multibillion dollar successes and brought community back into fashion in Europe and US, but then it certainly has its share of critics. The question remains whether the sharing economy model that materialized in the current recessive market e nvironment can sustain in the future market. This paper attempts to analyze the implications of collaborative consumption based on collaborative car sharing model to determine if collaborative consumption represents a viable and sustainable alternative to the ongoing hyper consumption economy. Keywords: Collaborative consumption, hyper consumption, sharing economy. Introduction Sharing has always been a common practice among friends, families, neighbors and members of the society. In recent years this concept of sharing has materialized from community practice to a disruptive business model widely popular as Collaborative Consumption (CC) or the Sharing Economy. This model is based on the very foundation of resource sharing and allows people to access resource without having to own them with in a short span of time (Gansky, 2010). Collaborative consumption is form of consumption developed on the premise of peer-to-peer exchange that facilitate lending, trading, renting, gifting, bartering, swapping and sharing of services and goods without having to procure them outright. Instead of paying the full amount to own a product that will probably be go unused; people can have shared ownership of the service or product by paying a small amount. This not only saves consumers expenses but in long run servers the economy and the environment as well (Botsman Rogers, 2010). Several factors have contributed to the rise of collaborative consumption. Venture capitalist Mark Suster at LeWeb conference, London pointed them as debt, demographics, un/under-employment, scarce resources, demographics and globalization (Suster, 2014). Such factors have shifted consumers from 20th century’s consumption behavior of hyper-consumption towards new socio-economic phenomenon. (Botsman Rogers, 2010)In their book â€Å"Whats mine is yours† have identified the key drivers of collaborative consumption as: â€Å"A global recession that has fundamentally shocked consumer behaviors†. â€Å"A renewed belief in the importance of community†; â€Å"A surge of peer-to-peer social networks and real-time technologies†; and â€Å"Pressing unresolved environmental concerns†; The resurgence of the collaborative economy the aroused many questions surrounding the implication and associated risks. One of the major questions is what will be the impact in the economy and can it really sustain in the future and succeed in enhancing economy while addressing the environmental concerns. These questions will be explored in the following sections. Literature Review The consumer market in developed market is going through remarkable changes right now. This phenomenon of collaboration and sharing has disrupted the hotels (Airbnb, Couch Surfing), transportation( Uber, Lyft, ZipCar) and rapidly extending to other sectors such as financing (LendingClub, Kickstarter) and even staffing (Taskrabbit, Odesk). Implication of such disruption to the overall environment and economy is analyzed in the following sections. Short term Implications The traditional market place is undergoing huge disruption due to Collaborative consumption as it is the new model completely redefines the buyer-seller relationship. Here we look at the Auto Industry, where research show that ownership of 9-13 vehicles can be easily replaced by a single car sharing vehicle. To an average car manufacturer this is creates a direct revenue loss of at least $270,000. Further the impact on the eco system cascades from auto parts to car insurance, auto loans, fuels and other services (Owyang, 2013). From this perspective sharing of service and products between customers can lead to a colossal loss of tax revenue to the government. The Zero Marginal Cost Theory Sharing economy can dramatically reduce the production cost of services and goods. The power of the community vastly improves previously inefficient base process (such as taxi regulations) and creates a forcing function for business to generate profit based on products and services that appeal directly to users (Rifkin, 2014). In economic terms, the cost of a product – or a â€Å"good† – can be divided into two parts. The first part is a â€Å"setup cost† which is the cost of assembling the team and tools needed to make the first unit. The second part is called the â€Å"marginal cost† or the cost of producing a single, additional unit (Rifkin, 2014). Traditional manufactured goods like cars and smartphones are in green. As you ramp up output past the pain point, constraints on factory infrastructure, overtime pay and the supply chain eventually make widgets more expensive per unit to produce. Contrast this to digital goods like eBooks and smartphone apps in red. They just get cheaper and cheaper as you scale (Rifkin, 2014) (Cowen, 2013). The ownership of a core process is surrendered to community collaboration. Competitive markets have focused on driving productivity up and marginal costs down, enabling businesses to reduce the price of their goods and services to compete against each other and win customers. (Cowen, 2013) Within service industries likehospitality and transportation, new entrants are succeeding not by optimizing production, but by eliminating production cost altogether. Consider Uber vs. traditional taxi companies. For a traditional taxi company to add another taxi to its fleet, a car and license need to be acquired at significant cost. Instead of shouldering that setup cost, Uber can add another taxi to its inventory at almost no cost by enabling people to share their existing cars, all coordinated via the internet. Airbnb does the same for renting properties vs. acquiring more physical space (Rifkin, 2014). Within the next decade, businesses will need to become much more open and collaborative to survive in an increasingly zero marginal cost economy. The sharing economy and collaborative development will further streamline capitalism, and organizations that figure out how to master this dynamic will succeed. Long term Implication of Collaborative Consumption According to Nielsen’s global online survey of automotive purchase intent, 65 percent of respondents across 60 countries plan to buy a new or used car in the next two years. New car purchase intent is strongest in Asia-Pacific, where 65 percent of respondents say they will buy new, compared with only 7 percent that plan to buy used. In the region, this new car demand will be driven by consumers in India (77%), China (76%), Thailand (68%) and Indonesia (63%), where the expectation to buy is highest. The peer-to-peer rental and sharing economy could lead to more efficient allocation of scarce resources and a cleaner economy. The University of California at Berkeley’s Transportation Sustainability Research Center (TSRC) recently published theresults of a nationwide survey of over 6,200 car sharing memberswhich shows between 9-13 vehicles shed for every car sharing vehicle in the fleet. Of those, 4-6 vehicles were eliminated as a direct result of joining car sharing and the remainders were avoided/not purchased as a result of membership (Shaheen Cohen, 2013). If we compare such level of consumption to Zip Car every driver who gives up their cars and switch to Zipcar say they save an average of $600 per month. Car sharers report reducing their vehicle miles traveled by 44%, according to Susan Shaheen of the University of California at Berkeley, and surveys in Europe show CO2 emissions are being cut by up to 50% per user (Shaheen Cohen, 2013). On average, Zipcar members drive 2,500 fewer miles per year, saving 219 gallons of gasoline annually. It is expected that at current membership levels, Zipcar will save 16 million gallons of gasoline and 150 million pounds of CO2 annually (The Economist, 2012). Implication of Hyper-Consumption on Environmental Sustainability and GDP: From an economic point of view one can argue that high consumption is good for global economy as the worldwide private consumption expense (household level expense on services and goods) exceeded $20 trillion by year 2000 which is a four old increase from year 1960. Yet on the long run, if we view this from a broad perspective such level of consumption risks ecological degradation which holds back the global economy (Worldwatch Institute, 2011). A report based on research conducted by economists, policy experts and scientist show that current climate change and carbon emission have lowered the global economy by lowered global output by 1.6% of world GDP or by around 1.2 trillion dollars (2010 PPP). Losses are expected to increase rapidly, reaching 3.2% of GDP in net average global losses by 2030. If emissions continue to increase unabated in a business-as-usual fashion (similar to the new IPCC RCP8.5 scenario), yearly average global losses to world output could exceed 10% of global GDP before the end of the century, with damages accelerating throughout the century. The costs of climate change and the carbon economy are already significantly higher than the estimated costs of shifting the world economy to a low-carbon footing – around 0.5% of GDP for the current decade, although increasing for subsequent decades (DARA and the Climate Vulnerable Forum, 2012). Peer-to-peer activity is making waves by harnessing the power of local communities to build a more financially and ecologically sustainable future in ways and on a scale never before possible. From an economic perspective, it could also be argued that organizations such as Zip Car are adding to the output, if in a small way (Buczynski, 2013). GDP measures items bought rather than the use of the items/activity purchased. Take a simple example:the average drill is used for just 15 minutes in its lifetime. GDP measures the number of drills bought but in the case of a drill, this is a poor measure of a nation’s output when its usage is so low. While Government and policy makers obsess over GDP data, any serious economist should agree that an efficient economy is one in which the resources are deployed well, and where output is useful. To put it inRachel Botsman’sterms – pioneer of the collaborative consumption movement – we need to be taking into account numbe r of holes drilled rather than number of drills sold (Bostsman Rogers, 2011). The sharing economy is becoming an increasingly accepted feature of the business landscape. We estimate that the five main sharing sectors (peer-to-peer finance, online staffing, peer-to-peer accommodation, car sharing and music video streaming) have the potential to increase global revenues from around $15 billion now to $335 billion by 2025 (PwC, 2014). Sharing economy firms are disrupting traditional industries across the globe. For proof, look no further than Airbnb which, at $10 billion, can boast a higher valuation than the Hyatt hotel chain (Botsman Rogers, 2010). Uber is currentlyvalued at $18.2 billion relative toHertz at $12.5 billionandAvis at $5.2 billion. Beyond individual firms, there are now more than 1,000 cities across four continents where people can share cars. The global sharing economy market wasvalued at $26 billionin 2013 and some predict it will grow to become a $110 billion revenue market in the coming years, making it larger than the U.S.chain restaurant industry (PwC, 2014). The revenue flowing through the sharing economy directly into people’s wallets will surpass$3.5 billion this year, with growth exceeding 25%, according to Forbes. The business model – where peers can offer and purchase goods and services from each other through an online platform – continues to be applied to new ind ustries from car sharing to peer-to-peer fashion, among many others (Cannon Summers, 2014). Discussion of Result Collaborative consumption provides the platform to connect demand to the spare assets or space capacity. Growth of information and communication technology has eased access and research of all manners of information resulting development of numerous businesses through ground-breaking online applications. Such applications have found innovative ways to meet the demands by maximizing utility through efficient allocation of resource. New Collaborative Economy The new model enables peers offer complimentary revenues for listing their idle resources. This not only reduces the cost of the service or goods offered but acts as the substitutes of the market products. Hence the supply curve shifts rightwards and consumers are left with more choice and better price. The current consumption trend produces huge amount of waste as the most of the current economy is based on â€Å"take, make, dispose† processes. In such context collaborative consumption is the opportunity that tracks the idle capacities and transforms the maximum wastes into value resources. Not only this phenomenon provides financial gains as well as long term economic gains without pushing people to buy new products it also provides affordable way to act for the environmental sustainability. Many traditional business and labor markets have questioned the implication of completely switching to the collaborative economy. In this scenario what business needs to understand is that Collaborative Consumption is not a zero sum game (Gansky, 2010). Rather than viewing this as a competition, it shows the need to adapt them into more efficient, inclusive and better system. In fact traditional big companies have already entered the game such as the rental company Avis entered the market by purchasing Zip-car, BMW has invested in Park-at-my-house and GM has partnered with Relay-Rides (Hamari, Sjà ¶klint, Ukkonen, 2013). Collaborative consumption is socially and economically sustainable because it fundamentally adapts to the needs of the consumer in order to be successful, instead of the other way around. In other words, the consumer is not obligated to sacrifice their individual lifestyle or personal freedom. Because fewer products are needed to satisfy the same amount of people, less waste is created. In this way, collaborative consumption is also environmentally-sustainable. These firms bring significant economic, environmental, and entrepreneurial benefits including an increase in employment and a reduction in carbon dioxide emissions (in the case of car sharing services). Conclusion This research shows how a collaborative consumption facilitates easier access to capital goods without owning them and further free up resources and reduce pollution from reduced usage. A limit of this study is the assessment of political and social implications of the collaborative consumption. This could be a logical following work to this research. Through this study, we saw the environmental and economic prospects of collaborative consumption and opportunity it brings to consumers (peers) and businesses to be a part of global phenomenon towards efficiency and sustainability. Even though collaborative consumption is increasingly being valued in billions, it is still a nascent movement in the developing world. Awareness should be raised as it’s the decisions that organizations make today which determines how for the collaborative consumption can live up to its potential. Reference Bostsman, R., Rogers, R. (2011). 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