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Millennials & The “Sharing Economy”: Case-Based Study Of Airbnb & Uber

By Agrima Nigam

Abstract

The purpose of this paper is to determine the change in the consumer patterns of the millennials as compared to the previous generation of baby boomers and the effect it has on industries like the automotive and hospitality/housing industries that have been catering to the “ownership” type consumer base (generation X and baby boomers) as opposed to the “renting” type consumer base (millennials). This study includes secondary research base that involves collection of relevant data from existing literature from research papers, articles, surveys and newspaper reports. Based on the results obtained through case studies it is observed that, the consumption pattern has changed over generations and while the working classes of previous generations have considered ownership of car, house, etc. as pre-requisites for settlement, the millennials have a rather pragmatic view of settling. The millennials believe in what is called, the “sharing economy” and are more interested in on-demand or ride-hailing means of transportation (services offered by companies like uber, zoomcar, etc.) and have a similar notion about renting places rather than purchasing houses nowadays. This paper aims to find out how these consumer patterns are going to change the dynamics of these industries. Also, would these companies experience a downfall in the market as people’s lifestyle change in the coming years or, will they simply have to re- invent their markets to support the lifestyle choices of the millennials.



Introduction

There are numerous definitions of the term “millennial” available the social media, describing a particular section of the population based on certain set of years that they were born in. However, according to one of the theories suggested by (Mannheim, 1952), people are considered to be part of the same generation not just due the fact that they were born in the same time period but also because they are “similarly located, “sharing” a common location in the historical dimension of the social process.” In other words, he suggests that for people to belong to the same generation, they must share the same historical and social exposure during their formative adult years (Pilcher, Sep., 1994). So, to put it concisely “millennial” is the term used to refer to the generation that came of age during a time of rapid technological change, globalization and economic change, thus referring to people born around the early 1980s to early 2000s. Owing to rapid technological and economic changes that took place during the late 20th century and the early 21st century, the millennials have grown up experiencing a very different lifestyle as compared to their parents. Technologically comfortable, the most educated generation ever, multitaskers, and strongly influenced by friends and peers, millennials have a different buying behavior and other expectations from service providers, (Pentescu, 2016).

The millennial generation, considered the biggest generation currently, is swaying the market considerably, owing to their different, somewhat non-conventional consumption patterns. This generation has the first digital natives, who have seen the growth of internet and its rapid encroachment into our daily lives; hence, naturally their entire lives revolve around the World Wide Web. Everything from shopping to banking and even insurance facilities is available to them on their fingertips. The millennials are often characterized as people who believe in doing “smart” rather than “hard” work, which is certainly reflected in the way their make their consumption and investment choices. However, the millennials, like their previous generations aspire to leave their mark in the society, by taking advantage of their technological knowhow and developing a system of choices influenced by effortless and tension free lifestyle. Millennials are opting for “access not ownership” ideology as they have been reluctant to the idea of owning items such as houses, cars and other luxury goods, instead they are turning towards new set of services that provide access to products without the burden of ownership, basically what is known as the “sharing economy”.

In the last years, the sharing economy has emerged as an alternative to traditional exchanges, introducing the idea that users can grant other users temporary access to their goods and services for economic compensation. This shift was made largely possible by technological evolutions: Sharing platforms, which match users who share (providers) with users willing to pay for access (consumers), are based online and many services are available exclusively through a smartphone, (Ranzini, 2017). The sharing economy has provided the millennials with a convenient platform to gain instant access to commodities over the internet. Moreover, with the introduction of applications such as Uber, Ola, Zoom car, etc. into the market, it is certain that the conventional market in terms of the existing automobile industry has taken a severe hit.

It is necessary for the market to re-model and re-assess it functioning in order to stay relevant, for example, with the advent of digitalization, and with information accessible at one’s fingertips, conventional libraries became obsolete, as people preferred to simply browse for information over the internet rather than coursing through several books at a time. With this, the libraries re-invented their infrastructure to meet the ever-changing needs of the customers, by providing access to free Wi-Fi within the premises, e-pads, computer systems etc. However, it is also important to understand the impact that this change in consumption has on the parent industry that caters to the “ownership” type consumer base.

Although the initial enthusiasm of the “sharing economy” was fueled by the idea of sustainability and long lasting consumer satisfaction, it is imperative to analyze the impact of the millennial lifestyle on the automobile and hotel/ housing industry as a case study and understand the relevance and significance of the sharing economy in the future.



Theoretical Background

The Sharing Economy

The “sharing economy” also known as “collaborative consumption” is characterized by a platform that enables people to get temporary access to goods and services without the burden of purchasing the good itself. In the last years, the sharing economy has emerged as an alternative to traditional exchanges, introducing the idea that users can grant other users temporary access to their goods and services for economic compensation, (Ranzini, 2017).The nature of the sharing economy, aimed at least initially at co‐consumption, and its technological dependency have led both media and academic outlets to link it strongly to the so called ‘Millennial generation’ (Anderson & Rainie, 2010; Belk, 2014; Godelink, 2017). For Millennials who understand the importance of sustainable consumption and participate in such movements, collaborative consumption can induce three types of value perceptions: economic/utilitarian, hedonic and symbolic (Keeble, 2013).

The sharing economy is situated between two somewhat opposing schools of thought. One seeks to build the sharing economy around values. Rachel Botsman emphasizes empowerment, collaboration, openness, and humanness, (Pick, 2014). Others concentrate on “equality, sustainability and community” (Slee, 2015). The second school focuses on creating and capturing economic value, using what some critics describe as exploitative practices to maximize shareholder profits (Gorenflo, 2015, Scholz, 2016).

With the advent of the sharing economy, much speculation arose on the grounds of safety and security in terms of the transactions, however, gradually it was noticed that the millennials trusted the online facility of transactions even though the transactions took place between complete strangers. Moreover, consumers have access to a system of feedbacks and service rating that allows them to better their judgment. Therefore, it acts as a huge incentive for tech savvy millennials to opt for services online. With this success, the sharing economy has quickly expanded to almost every industry and economic sector.



Millennials and the sharing economy

Millennials are an integral part of the sharing economy as they fit perfectly in both schools of thoughts, first one being, millennials are more open to new experiences, identify with enhanced social interactions and value new connections and second, they more sensitive and aware about the environment and therefore view the concept of sharing economy to be a sustainable option. One assumption enjoying wide support within both schools of thought is that millennials in general have shifted from ownership to access, which is also a key element of the sharing economy, (Belk, 2014). Technology also has a major role to play, as with the advancement of technology, the digital natives i.e. the millennials are sufficiently equipped with all the necessary facilities required to gain access to far-reaching services online. The digital technologies driving the sharing economy (Martin, 2016) reduce transaction costs and create trust between strangers (Botsman and Rogers, 2010). They also make “sharing assets cheaper and easier” (Economist, 2013). This elaborate and sophisticated use of technology increases the appeal of the sharing economy among millennials, especially when platforms capitalize on mobile technologies (Elliott and Reyndols, 2014).

It is however, crucial to de-code the choices that millennials make nowadays. With majority of the students taking student loans, coupled with fewer employment opportunities, millennials have resolved to staying with their parents or renting apartments, instead of purchasing a house. These students, with less money to spend and more debt to repay have prioritized their needs accordingly, thus the concept of ‘sharing’, ‘accessing on-demand’ are attractive incentives for the millennials. Millennials are the most numerous group, catching up with numerous car purchases with baby boomers easily. In Quarter 1 2016, the home ownership rate for buyers under 35 was 34.2%, down from 39.8% in 2009. This age group now has a greater chance of living with their parents than with a partner. Millennials usually postpone marriage and have children until later in life, which also prevents the need to purchase a home. Economic factors are also at stake; however, few tenants can afford to live in a medium-price home. Younger home buyers have lower credit ratings, which makes home loans difficult and impossible to obtain.

On the contrary, though renting out apartments might seem a feasible option in the short-term, it may not be cost efficient in the long- term. Hence, investments in properties, vehicles etc. are the opportunity costs that the millennials will incur in the long-term. Companies like Airbnb and Uber claim to be sustainable as they require almost no extra investment in infrastructure or purchase and installation of raw-materials and hence do not contribute to polluting the environment in their operation, yet, it is difficult to predict the sustainability aspect of the sharing economy in the long term.



Methodology

The paper fundamentally uses secondary sources and takes a case- based approach to delve into the impacts of peer-to-peer facilities of the sharing economy on the transportation and hospitality industry. This study includes secondary research base that involves collection of relevant data from existing literature from research papers, articles, surveys and newspaper reports. Based on the results obtained through case studies it is observed that, the consumption pattern has changed over generations and while the working classes of previous generations have considered ownership of car, house, etc. as pre-requisites for settlement, the millennials have a rather pragmatic view of settling. Which is further discussed in the review of literature. The literature further explores the change in consumption behavior of the millennials as opposed to the previous generations and their high dependency on the sharing economy. The author further takes into two case studies- one based on the impact of Airbnb on the hospitality sector and the second on the impact of Uber on the transportation industry. Further, these case studies are analyzed and various insights gained are used to draw significant conclusions.

Case study: Impact of Airbnb on the Hospitality Industry

Airbnb describes itself as “a trusted community marketplace for people to list, discover, and book unique accommodations around the world,” and it exemplifies a peer-to-peer marketplace in the sharing economy. Prospective hosts list their spare rooms or apartments on the Airbnb platform; establish their own nightly, weekly or monthly price; and offer accommodation to guests. Airbnb derives revenue from both guests and hosts for this service: guests pay a 9%–12% service fee for each reservation they make, depending on the length of their stay, and hosts pay a 3% service fee to cover the cost of processing payments, (Airbnb Summer Travel Report: 2015, 2015). Airbnb is a website that offers accommodation rentals for the public. Users of the website have to register and create personal profiles on the website. Each accommodation object is linked to one landlord. A landlord’s personal profile includes information such as recommendations from other users, reviews from previous customers, responsiveness rating and a private messaging system. Travelers can publish, discover and book accommodations from unique sources around the world. All of these have made the company a well-known recent representative of the sharing economy, (Lin, Wang & Wu, 2017). Since its launch in 2008, it has gained worldwide recognition and their online marketplace has experienced very rapid growth, with more than two million properties worldwide and over 50 million guests who have used theservice by September 2015, (Airbnb Summer Travel Report: 2015, 2015).

In their early stages, these startups promised that their services would heal a society ravaged by out-of-control consumerism, restore authentic communal bonds, reduce carbon emissions and other environmental impacts, and finally replace the outmoded hierarchies of corporate life with new, networked economic structures where everyone could be their own boss. But the good intentions of yesteryear soon evaporated to reveal a markedly different reality. In New York, San Francisco, Paris, Amsterdam, and Berlin, city governments have cracked down on illegal home rentals, blaming companies like Airbnb for rising rents, housing shortages, floods of visitors, and transforming local communities into tourist playgrounds, (Bulajewski, 2018). The aim of thi case study is to analyze the impact of Airbnb on the incumbent hotels and other companies byunderstanding the effect on pricing, marketing, occupancy rates, etc. In an analysis done by (Byers, Proserpio & Zervas, 2013), wherein the authors performed empirical research on the impact of Airbnb on the hotel industry in Austin, the Texas city with the highest Airbnb penetration, we estimate that the impact of Airbnb over the past five years is approximately 10% of hotel room revenue (this calculation is based on an increase in cumulative Airbnb supply from approximately 450 listings in 2010 to over 8,500 listings in 2014, yielding arevenue impact of 1−(8,500/450ି଴.଴ଷଽ).

Considering the high fixed costs associated with operating a hotel, this figure could represent a significant fraction of hotel profits. Further results suggest that with the arrival of Airbnb, the housing prices went up and the charges for hotel room occupancy also increased. According to (Byers, Proserpio & Zervas, 2013), some stays with Airbnb serve as a substitute for certain hotel stays, as the occupancy charges at hotels are more and the hotels provide less personalized products than the peer-to-peer platforms. Although, due to the lack of business spaces and conference rooms in Airbnb facilities, it is observed that bigger hotel or high-priced hotels, that host a variety of visitors are not as affected by peer-to- peer based accommodations. Moreover, hotels have high fixed costs as compared to Airbnb and thus suffer significant losses in revenue due to an increase in supply of Airbnb accommodations. Impact of Uber on the automobile/transport industry While some argue that companies like Uber have increased the demand for “on demand hailing” services through their less expensive solutions for a widespread consumer base, nevertheless,

The Economist examined whether Uber taxis were substitutions for the incumbent yellow taxis and suggested that Uber had a business-stealing effect on taxis rather than a complementary one (Kim, Baek & Lee, 2018). As, an example of creative destruction, it is noticed that with Uber’s entry into the market, the traditional or incumbent taxi services have tried to better their services significantly to meet the higher standards set by their competitor. (Kim, Baek & Lee, 2018) states that Uber has majorly affected the demand side of taxi trips. With its diverse spread of locations for pick-up and drop, lower and fixed rate patterns, convenient hailing facilities online and through mobile- applications, Uber has indeed taken a huge chunk of the cake when it comes to consumer’s demand. Since Uber’s entry into the market the total number of taxi trips per month has reduced considerably. In reality, Uber has affected not only the supply-side but also the demand-side. People’s perceptions of possessing a vehicle and the way people commute from the outer boroughs of New York City have changed since the rise of the sharing economy. According to (Cusumano, 2017), Uber is also investing millions of dollars in autonomous vehicle research in the hope that, someday, it can eliminate drivers. If and when Uber does go driverless, it will then have to own or rent a fleet of cars—yet another enormous expense. The company may hope to drive competitors out of business and then raise prices, but Uber is likely to run out of venture capital long before that happens. These technological advances in this sector would have an adverse impact on the operating man power i.e., the taxi drivers.



Analysis and Discussion

According to (Frenken & Schor, 2017), the sharing economy has some sustainable effect on the economy. Using the srvices of companies like Uber and Airbnb, consumers not only get cheap access to goods by renting or lending them from others, but by doing so are becoming less dependent on ownership. As a result, total number of new goods produced could decline. This feeling is largely fueled by the perceived environmental benefits of car sharing. As cars stand idle 95% of the time, any type of sharing scheme that makes cars accessible to non-car owners would reduce the number of cars required for a given mileage. Millennials are more aware of the impacts of consumerism on the environment as compared to the previous generations. Most of the millennials try to live by sustainable consumption and thus, resort to alternatives to ownership.

Although these peer-to-peers based companies promise a more sustainable future, their business models are proving exhaustible and a threat to the incumbent firms that believe that companies like Uber and Airbnb may become irrelevant in the future. Uber’s dystopian case studies are symptoms of a bigger problem. Where formal employment has collapsed, the “gig economy” has stepped in. Hawked as the modern way to make a living, jumping from job to job, free to drive or write or housesit, “employees” can work as they want, according to their own schedules (Mohammed, 2017). With this it is eminent that the workers in the incumbent firms are majorly suffering due to the advent of the “gig economy.” Initially these startups presented an image that the “gig economy” would reshape careers, and even entire workforces in a way that resembles the days before the original industrial revolution. But, due the promotion of “free-lancing” and more people taking part in it, the traditional or the daily wage earners such as taxi drivers have lost their means of livelihood.

Airbnb is an online peer-to-peer hospitality service that allows people to lease or rent short-term lodging. Airbnb itself does not own any lodging; it connects providers and users of lodgings and receives service fees from each booking. Similarly, Uber is an online peer-to-peer ridesharing service that allows people to lease or rent a ride. Working under the same sharing economy business model as Airbnb, Uber does not own any car but serves as a broker that connects providers and users of rides and charges commission fees for each ride (Lee, Chan, Balaji & Chong, 2018). Therefore, like any middle-man these companies do not have to bear high fixed costs or spend on capital and infrastructure as opposed to their competitors (incumbent firms). Such a business model has allowed many more companies like Uber and Airbnb to achieve the untapped potential and earn huge profits but have adversely affected the incumbent firms operating as per the traditional business model.

Figure 1: Projected growth of sharing economy and traditional rental

Source: : “The sharing economy—sizing the revenue opportunity,” (Hawksworth & Vaughan, 2014) Airbnb's effect on the U.S. hotel industry has resulted in a 1% rise in Airbnb rentals resulting in a 0.05% decline in quarterly hotel revenues. Also on examining whether the occupancy rate of a hotel had decreased after Airbnb entered the hospitality industry, it was found that a 10% increase in the supply of Airbnb resulted in a small decrease in the hotel occupancy rate of about 0.0007%. On assessing the impact of the sharing economy on the tourism industry it was found that the former created new jobs as more visitors arrived due to lower housing costs (Kim, Baek & Lee, 2018). Similarly (Kim, Baek & Lee, 2018), examined how Uber affected traditional taxis by examining various factors such as the number of taxi trips, the average daily revenue of taxi drivers, and occupancy rates were measured as proxies for determining whether Uber had initiated a business-stealing effect. These variables reflect whether consumers, who used to use taxis, deviated to Uber, which would ultimately lead to a decrease in the number of taxi trips, daily revenue per taxi driver, and occupancy rates. It was found that the initial taxi users deviated towards Uber and other “ride-hailing” services.

According to (Byers, Proserpio & Zervas, 2013), Airbnb offers a much wider range of products and services than hotels: Airbnb users can rent anything from an apartment to a yurt. More importantly, because Airbnb leverages existing housing inventory, it can potentially expand supply wherever houses and apartment buildings already exist. This is in contrast to hotels, which must be built at locations in accordance with local zoning requirements. Therefore, competition by Airbnb is potentially harder for incumbents to adapt to, compared with competition by other hotel firms. Turning to consumers, we show that hotels in areas where Airbnb has an established presence have responded to increased competition by lowering their prices, which harms their revenues but benefits travelers, even those who do not use Airbnb. In addition to reduced prices, consumers also benefit from increased variety provided through peer- to-peer platforms. Furthermore, consumers on the supply side benefit through additional income generated by providing goods and services through peer-to-peer platforms.


Conclusion

With change in the consumption patterns of the millennials due to various factors as discussed in the paper, it is seen that the millennial generation is more inclined towards the “sharing economy” as it offers a means of lifestyle and convenience that the millennials can relate to the most. More importantly however, as the millennial generation is approaching the working class section of the population, and taking part in the economy, the sharing economy is also expanding as the consumer base is increasing. The prospects of expanding their consumer base, companies like Uber and Airbnb not only target the millennials but offer everyone and anyone the opportunity to earn through free-lance sharing and ending. As discussed in the paper, the entry of the share-based companies has taken a negative toll on the existing incumbent industries and traditional practice of lending has also been affected significantly. The case study however, highlights that with the entry of Uber into the market the existing traditional taxi drivers and the incumbent firms tried to better their services and operations to keep up with the competition in the market. Although, due to their relatively unique business model companies like Uber still out-shined their rivals. But it is indeed interesting to observe that some of these traditional companies are trying to re-invent their markets to support the lifestyle choices of the millennials.

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