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Awakening to Regulation

Airbnb has prompted most states to enact legislation to control the impact of its presence on local markets. According to Davide Proserpio, the race is on for academic data to substantiate the private studies underlying current policy

July 06, 2018

Airbnb, Uber, Etsy. These pioneers of a peer-to-peer business model helped establish the sharing economy in the United States just more than a decade ago. The rapid growth of the model, enabled by technological innovation and pricing flexibility, has left longstanding industries—hotel, transportation, retail—scrambling to adapt.

Within the academic community, researchers quickly set out to measure and quantify the impact of this emerging economy, with studies ranging from design and regulation within the peer-to-peer market, to impact on miles traveled by car-sharing services, to the economic theory of two-sided platforms such as Airbnb.

But until USC Marshall Assistant Professor of Marketing Davide Proserpio and his colleagues began their first study five years ago, research was rarely focused on competition between peer-to-peer companies and traditional businesses that offer similar goods or services.

“The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry," published in the Journal of Marketing Research with Boston University professors Georgios Zervas and John W. Byers in 2017, analyzed Airbnb's entry into the state of Texas. The company was launched during SXSW 2008, with two bookings in Austin.

Until USC Marshall Assistant Professor of Marketing Davide Proserpio and his colleagues began their study five years ago, academic research was rarely focused on competition between peer-to-peer companies and traditional businesses that offer similar goods or services.

Using data collected from Airbnb and monthly hotel room revenue from approximately 3,000 hotels in Texas dating back to 2003, the researchers assessed the impact Airbnb has had on the state’s hotel room revenue.

They found that each additional 10% increase in the size of the Airbnb market resulted in about half a percentage point decrease in hotel revenue. This, as Airbnb only continues to grow. In 2017, the company counted three million properties supplied by more than one million hosts in 150,000 cities and 52 countries. Revenue reached $2.8 billion worldwide in 2017, with nearly $19 million in Austin, in the third quarter of 2017 alone.

Proserpio said the effect is manifest in lower hotel room prices. “This benefits all travelers,” he said, “not just participants in the sharing economy.” 

But if You Own a Hotel Chain…

On the other hand, Airbnb harms traditional suppliers, not just through increased competition, but because hotels are not as nimble as multi-platform providers can be. At peak times, Airbnb supply can easily scale up to accommodate increases in demand. “This is a key differentiating feature of peer-to-peer platforms,” Proserpio said. ““And this feature reduces the pricing power of hotels during these high-demand periods, which are the most profitable for hotels.”

From hotels, Proserpio went on to study Airbnb’s impact on the housing market. “Intuitively, if Airbnb affects long-term rental supply, then we should see an effect,” he said. “And, indeed, we find the impact on housing is measurable and non-negligible. Transformation has come. We’ll see where it goes.”

“The Sharing Economy and Housing Affordability: Evidence from Airbnb,” a working paper written with Kyle Barron (Ph.D. student at NBER and MIT) and Edward Kung (assistant professor of economics at UCLA), shows that Airbnb leads to an annual rise in rent prices of an estimated 0.018%, and a rise of about 0.026% annually for home prices. The researchers based these findings on rents and home prices between 2012 and 2016 in the 100 largest metro areas in the U.S. Their study provides the first estimates of the effect of home-sharing on housing costs that uses comprehensive data from across the county.

Or Looking to Rent a House or Apartment…

Beyond corroborating that Airbnb is impacting the housing industry, Proserpio and his team found the smallest effect of Airbnb is seen in ZIP codes with a larger share of owner-occupied homes. “Intuitively the owner-occupancy rate matters because only non-owner-occupiers are on the margin of substituting their housing units between the long and short-term rental markets,” according to the study. “Owner-occupiers interact with the short-term market only to rent out unused rooms or to rent while away on vacation, but they do not allocate their housing to long-term tenants.”

Couple this with the fact that today on average, one in 13 potentially available homes is being placed on Airbnb instead of being made available as a long-term rental, according to paper co-author Edward Krug. This reallocation of housing reduces the supply of long-term rental units and increases the price for residents looking for long-term housing. Prices for home ownership also go up as property values rise based on the earning capacity of the home.

At the same time, the short-term rental market burgeons. One Brooklyn neighborhood saw a 41% increase in Airbnb rentals annually from 2012 to 2016, along with a more than 7% annual increase in rents.

“There’s no doubt,” Proserpio said, “Airbnb has a non-negligible impact, particularly on long-term rentals.”

More Regulation is Coming

The study’s findings support critics of home-sharing who argue it raises housing costs for local residents, which is a negative effect for renters. But market value for some homes also can increase, which is a positive effect for home-owners. “Given these effects, it is not yet clear whether the overall impact of Airbnb is positive or negative,” said Proserpio. “But independently of the answer, we will probably see more regulatory behavior to control the effects of Airbnb and the sharing economy in general.”

Already we have seen an increase in regulations on Airbnb, its hosts and guests, and the researchers think some of that is good. But, they state, “regulations on home-sharing should (at most) seek to limit the reallocation of housing stock from the long-term to the short-term markets, without discouraging the use of home-sharing by owner-occupiers.”

Most importantly, Proserpio said, regulations should be based on solid data. While the academic community has risen to the call for information about the sharing economy, e-commerce and social media, those environments evolves so quickly, it’s hard to keep up. But, he argues, we must keep up. “We have to have data-driven regulation, and we need to look at numbers every month. Regulators should read data, and adjust policy regularly.”

"We will probably see more regulatory behavior to control the effects of Airbnb and the sharing economy in general.” --Davide Proserpio

User behavior in the sharing economy is the next topic of Proserpio’s research. His working paper, “You Get What You Give: Theory and Evidence of Reciprocity in the Sharing Economy,” looks at how the sharing economy affects the behavior of people in these markets. He says the sharing economy markets “introduce a social interaction—between sellers and buyers—that’s new. For example, an Airbnb stay is very different from a typical hotel stay. In some sense, it is more personal.”

Taking Airbnb as a use case, Proserpio and his coauthors (Wendy Xu and Georgios Zervas) model such interaction, and demonstrate that in these markets reciprocity plays an important role by affecting  the quality of the stay, ratings and, in turn,  listing prices.

“On Airbnb, for example, this means that by responding positively to a good guest behavior will not only improve your rating as a host, it will allow you to charge higher prices in the future.” said Proserpio. "Airbnb has a non-negligible impact on the housing market.”

Proserpio’s recent work includes two papers with Georgios Zervas: “Study: Replying to Customer Reviews Results in Better Ratings in Harvard Business Review (2018), and Online Reputation Management: Estimating the Impact of Management Responses on Consumer Reviews” in Marketing Science (2017).

Also in 2017, Proserpio publishedSharing Economy: Review of Current Research and Future Directions with Chakravarthi Narasimhan, Purushottam Papatla, Baojun Jiang, Praveen K. Kopalle, Paul R. Messinger, Sridhar Moorthy, Upender Subramanian, Chunhua Wu and Ting Zhu in Customer Needs and Solutions.