Sharing Economy: Network Effect and Transaction Cost

This assignment delves into the concept of the sharing economy, focusing on the significant role of network effects and reduced transaction costs in its success. It examines how companies like Uber and Airbnb leverage these factors to provide affordable and convenient services, ultimately disrupting traditional industries. The analysis includes personal anecdotes illustrating the benefits of the sharing economy.

Running head: SHARING OR GIG ECONOMY
Sharing or Gig Economy
Name of the Student
Name of the University
Author Note

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SHARING OR GIG ECONOMY
Introduction to Sharing Economy
Sharing economy refers to all sorts of social and economic activity involving the online
transactions. Online transactions are an open source community where sharing of access to goods
and services takes place on peer-to-peer basis. The phrase "sharing economy" started to trend in
the beginning of 2000s, when the factors like Recession, new social technologies, increase in the
global population growth and resource depletion had led new business structures to emerge.
(Hamari, Sjöklint and Ukkonen 2016). In this economy, the trancations are made over the
internet resulting in reduction in the transaction cost. Companies like Uber, Airbnb and many
more are evolving as the most suitable service providers at present. Uber provides transportation
services and through Airbnb, one can book hotels and rental rooms in any part of the world
sitting at a particular location.
Network Effect and Transaction Cost
The network effect is the phenomenon where the number of user of a particular good or
service is increased day by day and the value commodity to its customer increases. The rise of
the internet along with the craze for the social media has made a platform of network effect,
through which one can get service through just a touch of a button (Boudreau and Jeppesen
2015).
Transaction cost or substation effect on the other hand refers to the cost that is incurred to
enter into a transaction. It includes all the indirect cost attached to obtain the good or the service.
Expenses like communication fees, legal charges, and informational cost are termed under
transaction cost.

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SHARING OR GIG ECONOMY
Reflection on the network effect and transaction cost of the Sharing Economy
The evolution of the various online applications and social media led to the rise of
sharing economy. One can get the service at any time and at any place just by opening the
website. The variety of service provided and along with the quality of service is much better than
the regular markets (Telles 2016)
The transaction cost included in the sharing economy is low, as it does not include any
expenditure other than the internet charges. The network effect of the sharing industry like the
Uber and Airbnb is rising tremendously at present. Uber provide transport facilities at the
doorstep with affordable rates. Similarly, due to no transaction cost, Airbnb offers cheap hotel
rates cost ranges from 30%-60% less than usual traditional room rates in the hotel industries
across the world, making them reach the peak. The Airbnb model in numerous ways diversifies
the usual trends of the traditional hotel industries (Haywood 2016).
The different companies at present are adapting this new online technology and are
facing a huge competition with the sharing industry and thus providing goods and services easily
to the customers through online applications. It has been observed that the consumer satisfaction
and the network effect is high in case of these industries. A rational consumer will always take
the advantage of the low cost and easily available service rather than the spending more on the
transaction cost (Hansen and Windekilde 2016).
Booking flights, shopping, hotels and even transport at door steeps are available online.
Due to globalization, one can easily obtain any service or good easily from any location. The
world has become smaller and life has become easier due to this network of industries.

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SHARING OR GIG ECONOMY
Moreover, the number of options available is more as there is a huge variety of display in the
websites of the companies.
To elaborate more on the network effect and the transaction cost of these sharing industry
I would like to narrate an own experience while I was returning from Muscat for some official
work. I missed my late night flight and there was no flight available to my home within 24 hours.
I have no relatives at Muscat and there was limited cash available with me. I had no idea where
to go and spend the night in such a secluded area near the airport. The nearby hotels available
were too costly. Therefore, I decided to use the airbnb for rooms for the first time. Immediately
after opening the app from my phone, I got a list of good number of hotels nearby. The ones that
were out of my reach in terms of rates were also offering lodging at affordable price through
Airbnb. These industries have links with the hotels and provide the service to its users at their
rates. Restaurants were also available along with the hotels. Since then I have been a regular user
of the Airbnb where I get all types luxury rooms at friendly rates and in every location. Traveling
has now become hustle free and economical. Without any transaction, cost just by clicking a
button, rooms, flights and hospitality service is available online. Life has become easy because
of this wide networking of the sharing economy.
Conclusion
There is a tremendous rise in the network effect and growth rate of the sharing economy;
the regulators in countries across the world are facing several new challenges due to the
uniqueness of the sharing economy. These sectors have an inherent motive to encourage a
competition that would eventfully lead to innovation, better quality products along with services
at lower price due to minimization of transaction cost.

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References
Hamari, J., Sjöklint, M. and Ukkonen, A., 2016. The sharing economy: Why people participate
in collaborative consumption. Journal of the Association for Information Science and
Technology, 67(9), pp.2047-2059.
Haywood, J., 2016, October 11. New Airbnb data sheds light on 13 global markets. Hotel News
Now, p.1. Retrieved February 16, 2017
Telles, R. J., 2016. Digital Matching Firms : A New Definition in the “ Sharing Economy ”
Space. ESA Issue Brief, (01–16), 1–27. Retrieved February 16, 2017,
Boudreau, K.J. and Jeppesen, L.B., 2015. Unpaid crowd complementors: The platform network
effect mirage. Strategic Management Journal, 36(12), pp.1761-1777.
Hansen Henten, A. and Maria Windekilde, I., 2016. Transaction costs and the sharing
economy. info, 18(1), pp.1-15.