Strategy and Competition

Manchester Business School

Strategy & Competition Part A – Assignment 1 – Individual Assignment

                                                         Student ID: 10274467

1. Introduction:

The sharing economy is phenomena where consumers provide each-other with short-term rights to access their underutilized assets. This access is facilitated on peer-to-peer platforms which exploited the technological advancement to lower the cost of transaction creating circular business models which led to reduction in consumption and subsequently in carbon emission and disrupted industries (Frenken e Schor, 2017; Benkler, 2014). In this paper I will examine the network effect of these platforms and the claims that they have reduced the transaction cost.

1. The network effect:

1. Competitive advantage:

With the innovative idea of employing advanced technology to generate the new sharing business model, these internet platforms were able to attract mass number of users. The significant number of buyers and sellers subscribed to these two sided marketplace platforms, made them of tangible value from a demand and supply perspective, as the increased demand from the consumers on one side of the platform will be met by sufficient supply on the other side, which created a network effect making the platform of a value to its users (Niam Yaraghi and Shamika Ravi 2017 citing Haucap & Heimeshoff, 2014). When I used “Get transfer” app to hail a taxi to Lisbon airport, I received sufficient number of offers with almost no time, offering different options of cars and services reasonably priced.

Despite the network effect which gives a competitive advantage to these platforms, the moat which this effect has created is not deep enough as (Fox, 2017) indicates that the switching cost into new app is very low, and the market will remain open to new entrants.

1. Disruption to industries:

This competitive advantage these platform acquired by the network effect made these platforms a major threat to many industries. Hospitality industry is disrupted by Airbnb, transportation disrupted by Uber. (Le Jeune, 2016) in her report projected that this disruption will spread into other industries such as travel equipment , luxury jewelry, sports goods and many others. In response to this disruption major hotel chains in the hospitality industry started to list their rooms on Airbnb i.e. “If you can’t beat them, join them”, in numbers, Hilton and Intercontinental have listed 750,000 and 700,000 rooms on Airbnb in 2016.

From another perspective, in case of the transportation industry, as the strive to own an asset is replaced by the right of having an access to it as more people tend to ride-share, some can argue that there will be an impact on auto manufacturing as this maximization of asset utilization might reduce the demand. (Hughes, 2017) argues that this should not affect the overall number of depreciated cars within the market as the lower demand on the side of those using ride-sharing will be offset by increased demand by those who are putting their cars for sharing. However, (Muller, 2016) indicated that the ride sharing alone wouldn’t impact the car demand as the cost per mile for sharing is still higher than using own car, the situation might change if the driver cost is taken out of the formula. In this context, car manufacturers started a competition to sign deals with Uber and Lyft to develop driverless cars for commercial use. In 2015 GM invested 500 million in Lyft who finally signed a deal with Ford in “a move ahead of strategy update” from the new CEO of Ford at the time Jim Hacket (Campbell, 2017)

1. Transaction cost:

1. Search, Contract and Monitor:

(Dahlman, 1979) gathered the transaction cost in three major components: search and foreknowledge cost, the cost of negotiating and finalizing the contract, beside the cost of monitoring and managing the contract. Internet platforms in a way succeeded in making the search for suitable accommodation and finding ride in fraction of time more possible. Booking my flight to Lisbon last January was very convenient on CheapOair as I was able to compare flights on different airlines in details, making the booking and completing the payment in a minimum time.

1. Uncertainty:

Uncertainty on how the peer on the other side of the platform might act, as an assumption of opportunism and bounded rationality, beside the uncertainty whether the quality of the product or the service will match what was advertised. (Teo et al, 2004)

Although sharing of accommodation and transportation was possible prior to the platforms’ emergence individuals preferred traditional hotels and taxis as they offered predictable service quality. The consumers were simply uncertain about the services offered by the substitute. (Anders e Iwona, 2016) argued that the internet platforms reduced the transaction cost generated by uncertainty due to information asymmetry by providing easy and quick access to information.

Back in 2013 I rented an apartment in Istanbul through booking.com, despite the absence of standards translated into stars when booking a hotel, the detailed information advertised about the property, the photos, and the chance I had to contact the owner prior my trip, all resulted in reduction of information asymmetry and made me proceed with the booking. “The utility is transparent and the benefits distributed more transparently” (Mason, 2015) 

1. Trust:

If a certain level of trust is reached it can be presumed as variable that can reduce the transaction cost (Teo et al, 2004). Online platforms introduced measures to build trust; one is the reputation and feedback rating mechanism which enabled users on both sides of the platform to rate each other allowing them to build a reputation that is necessary in any transaction. Another is getting directly involved in screening, background check and imposing strict criteria to join the platforms.  Similar to Lyft’s driver selection process –which can also be a strategy to send a signal to the market that Lyft is serious about the quality of the transaction- which might initially limit the volume of the transactions on the platform however, when the market picks the signal the transactions will increase. (FTC, 2016); (Einav et al., 2016).