Market Structure with the Entry of Peer-to-Peer Platforms: The Case of Hotels and Airbnb

Abstract:
Online marketplaces have reduced entry costs across a variety of industries. These marketplaces allow small and part-time service providers (peers) to participate in economic exchange, often in competition with more traditional suppliers. For example, Airbnb and 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 cities larger Airbnb presence is associated with low opportunity costs of renting out spare rooms, high investment costs of building hotels, and high demand volatility. We then provide reduced form evidence on the effect of Airbnb entry on hotel revenue, and highlight important city heterogeneity. We then derive a simple model of competition between a peer- to-peer marketplace and hotels to explain our reduced form findings. Lastly, we discuss preliminary work in estimating this model. This model allows us to determine the efficient market structure conditional on the level and variability of demand, and to quantify the welfare gains from peer-to-peer entry in the accommodation industry.