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Essay: The Mechanisms of Airbnb and its Socioeconomic Consequences

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Airbnb is a rapidly growing online marketplace that allows individuals to rent or list residential properties. Airbnb is often termed one of the pioneers of the ‘sharing economy’, which is a collective term for firms that are built around the sharing of human, physical and intellectual resources. The sharing economy operates on a variety of Internet-based platforms and applications that allow individuals to share goods and services on a large scale; it allows individuals to leverage the value of assets that would otherwise only serve a personal purpose (SOURCE).

Airbnb was founded in 2008 and has served over 50 million guests since. The total market value of Airbnb eclipses an astonishing 30 billion dollars (SOURCE). The exponential growth of Airbnb, but also many other firms within the Sharing Economy, such as Uber or TaskRabbit, can be explained by several defining factors such as innovative use of technology, reduced transaction costs and supply-side flexibility (SOURCE). Technological advancements allow firms like Airbnb to incorporate and streamline large amounts of dispersed information, translate these into searchable listings for consumers, and lower the threshold of market entry for suppliers. Consumer incentives are key for a market design based on ‘sharing’, as it is built around the experience of the user.

There is unfortunately also a dark side to be unveiled if one puts the emergence of the peer-to-peer market in a socioeconomic context. Airbnb threatens the market share of the hotel industry, puts pressure on the housing market, contributes to nuisance in cities, and causes tension with regulated markets. Finally, a transaction process that is based on trust and individuality may consciously or subconsciously encourage discrimination.

This research paper aims to provide an overview of the characteristic components of firms operating within the sharing economy, zoome

How Does Airbnb Operate?

Innovative Use of Technology

Innovative use of technology serves as the basis of the Sharing Economy and a powerful tool to help buyers and sellers find one another in an effective manner. Airbnb, as a market with limited capacity, is characterized by different matching functions than market with large capacity (Burdett et al, S5FRICTION). Therefore, the buyer is able to specify their preferences in terms of location, price, and number of guests, upon which Airbnb presents an initial set of options. The variety within this set remains large enough for the buyer to refine their search in terms of e.g. type of apartment. If a listing within the final set seems appealing to the buyer, he or she will have the option to submit an inquiry to the seller about the availability. The seller is required to make a decision based on trust, availability, and the possibility of better offers. If the inquiry is accepted, the seller has the option to book the property. However, statistics show that inquiries are rejected by sellers 49% of the time, which often causes the buyer to leave the market although many potentially suited matches remain. Buyers on Airbnb therefore only view a subset of their possible matches and, as a result, more than 40% of the listings remains vacant for longer periods of time. Research demonstrates that, if aforementioned barriers would be removed and potential buyers had perfect information about all the options in the market and all the sellers that would be willing to accept their inquiry, an additional 102% more matches would be created and the revenue per seller would be increase by €107 (S1FRICTION).

Individual Choice

A high degree of heterogeneity within the market facilitates individual choice, but creates large amounts of dispersed information that has to be incorporated and processed accordingly, so a streamlined and informative search process for buyers can be created. Information that is dispersed in nature is processed most effectively in a market design that prioritizes choice (Einav, Farronato & Levin, 2015).

Reduced Transaction Costs

Sellers are able to have direct contact with the potential buyers through self-service uploads. There is no mediator which keeps the communication costs to a minimum and allows for the distribution of more information. Direct communication is provided before and after the booking process to facilitate discussions about property characteristics or certain requirements (Edelman & Geradin, 2015).

Lower Threshold for Seller Market Entry

Peer-to-peer markets lower the threshold to market entry for sellers. This is especially the case for flexible sellers, who will not engage in enough transactions to engage in the establishment of customer relationship and thus do not produce sufficient revenue for justification of large investments in advertising (SOURCE).

Supply-Side Flexibility

Supply-side flexibility is reflected in the ease with which suppliers are able to list and de-list the selection of rooms or apartments on offer (SOURCE).

User Feedback

Airbnb, like most of the peer-to-peer platforms, does not engage in up-front screening or certification. The market design of Airbnb relies on trust and user feedback to provide ongoing monitoring. Quality service is maintained through reputation and feedback mechanisms in which sellers are able to review their stay (Einav, Farronato & Levin, 2015). Fradkin and collagues reported that, when given an additional incentive, buyers were inclined to post reviews more often, and to post more complete reviews of their stays on Airbnb (2015). Airbnb also provides sellers with the opportunity to have certified photos taken of their property, signaling to buyers that the photos give an accurate representation of the rental space. Such implementations are necessary on a platform where the stakes of transactions are higher. Additionally, the design allows sellers to experiments with selling mechanisms, prices, and advertising strategies.

Pathway to Sustainability

Platforms like Airbnb enable the efficient use and allocation of resources by ensuring that assets remain active.

The facilitation of more intense use of personal assets

The sharing economy is built on the use of existing building (Martin, 2016).

An online platform allows for continuous adjustmenets

The Consequences of the Sharing Economy

Housing Availability

The effects of the rapidly growing sharing economy may be particularly interesting in the context of cities that have difficulty coping with increasing density and exponential population growth. A report of the Residential Landlords Association (RLA) showed a 24% increase in the number of properties in London that were listed on Airbnb. Furthermore, analysis demonstrated that properties available for more than 90 nights a year had increased by 18% by February and June. This adds up to a potential 13,320 homes that are unavailable for families on a long-term basis. To sum up, there is mounting evidence that Airbnb is drifting from its original vision of allowing home-owners to occasionally rent out their property when on holiday (Simcock & Smith, 2016). There is an increase in the number of people buying properties for the sole purpose of creating rental income.

Housing Affordability

Sheppard and Udell outlined consequences of Airbnb that have an impact on property values (2016):

• An increase in Airbnb properties causes a rise in the number of tourists and residents. These groups increase the demand for properties in the city, which in turn causes an increase in the property values.

• The increase in the population evokes a positive impact on the local economy. The quality of the local neighborhood quality increases, thereby boosting the property values.

• Airbnb enables a new stream of revenue for sellers, which increases income. A rise in income causes more demand for properties and an accompanied rise in property values.

• The influx of visitors also has a negative component: it brings along decreased safety, noise, and increased demand for publicly provided goods. This causes the local neighborhood quality to fall, and thus a reduction in property values.

Furthermore, they estimate that, in New York City, a doubling of the number of Airbnb listing corresponds to a 6% to 11% increase in residential property values.

Hotel Industry

There is plenty of evidence in the literature that an increased number of Airbnb listings in the area negatively affects hotels. Hotels offer less personalized products, and face higher fixed costs than the owners of Airbnb properties.

A study looking at the relationship between the number of Airbnb listing in the area and hotel revenue in the Netherlands found that a 1% increase in the number of Airbnb listing affects hotel revenue by 0.03% (Hooijer, 2016). However, if one compares the locations of accommodations between hotels and Airbnb properties in Amsterdam, there can be seen that hotel locations are mainly situated in the city center, whereas Airbnb accommodations are located about 2 kilometers from the city center. One out of nine Airbnb properties is located in the city center, compared to six out of eleven hotel locations (van der Heide & Minca, 2015). Trajectories of hotel visitors were mainly skewed towards the city center and touristic areas, whereas visitors of Airbnb residents seemed to have a broader interest that extended to neighborhoods with a more residential character. Airbnb claims that 70% of their listed properties are located outside main hotel districts, thus providing complementarity instead of competition on hotel offers (source Airbnb).

A research on the Texas hotel market industry compared the revenue of 3000 hotels in cities affected by Airbnb against the revenue for hotels in cities without Airbnb listings. Results showed that for each 10% increase in the number of Airbnb listings, a .39% decrease in hotel revenue occurred (Zervas, Proserpio & Byers, 2016).

Digital Discrimination

In order to provide a relationship of trust between buyers and sellers, sellers are encouraged to set up personal profiles, often with personal pictures. A study conducted by Edelman and Luca investigated racial discrimination in Airbnb. The study controlled for the factors such as . Findings showed that white sellers earn 144% more income from Airbnb compared to blacks (Edelman & Luca, 2014).

Laws and Regulations

Airbnb is one of the icons of the sharing economy that has provoked dissonance among the public concerning its business model. The sharing economy has not yet been recognized by law as a distinct capitalist system with its own regulatory policies, neither has it been classified to fall under the policies of an already existing market (Dyal-Chand, 2015). However, as this market becomes increasingly bigger, the unregulated sharing economy starts to clash with existing regulatory platforms. Its lack of policies and regulations calls for governments to regulate firms within the sharing economy, while still holding the benefits of such an economy intact.

Should visitors of Airbnb properties be taxed like registered hotel visitors,

cities and governments will have to question themselves whether unregistered Airbnb visitors should be taxed, just like regular registered hotel visitors. And sellers, who are using Airbnb to create additional revenue, should they be taxed over their income?

People who list their apartment on Airbnb are often unaware of the laws and regulations within their city and thus unaware that they potentially could be breaking the law.

Discussion and Conclusion

Several of the consequences of the sharing economy can be extinguished by implementing regulations that will ensure that the company remains within its initial vision of creating a community of home sharing, without diminishing the economic benefits of this new and innovative new online market design. An example of such an implementation took place in New York City, October 2016, where it is now forbidden to list entire apartments, but only shared apartments can be advertised. Other cities have established a law which allows sellers to rent their properties for only a certain number of nights a year, for instance Amsterdam, where the municipality has allowed inhabitant to accept reservations up to a maximum of 60 nights a year (SourceAirbnb).

Furthermore, undesirable effects can be prevented by enforcing a policy of transparency about listed properties, visitors, and owners on peer-to-peer market like Airbnb

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