Market Structure with the Entry of Peer-to-Peer Platforms: The Case of Hotels and Airbnb
Abstract:
Online marketplaces have reduced en
try costs across a variety of industries. These marketplaces allow small an
d part-time service providers (peers) to participate in economic exchange,
often in competition with more traditional suppliers. For example, Airbnb a
nd Uber allow almost anyone to become a hotelier or a cab driver. We first
characterize market conditions favoring the entry of peer producers. In the
context of the accommodation industry, we verify that across US major citi
es larger Airbnb presence is associated with low opportunity costs of renti
ng out spare rooms, high investment costs of building hotels, and high dema
nd volatility. We then provide reduced form evidence on the effect of Airbn
b entry on hotel revenue, and highlight important city heterogeneity. We th
en derive a simple model of competition between a peer- to-peer marketplace
and hotels to explain our reduced form findings. Lastly, we discuss prelim
inary work in estimating this model. This model allows us to determine the
efficient market structure conditional on the level and variability of dema
nd, and to quantify the welfare gains from peer-to-peer entry in the accomm
odation industry.