To Share or Not to Share: Adjustment Dynamics in Sharing Markets

Abstract

To aid in the description and estimation of the tremendous recent growth in the collaborative economy, we provide a model for the dynamics of sharing, subject to fixed costs and imperfect price formation. The sharing economy comprises a set of infinitely lived, heterogeneous suppliers, who take recurring decisions about entering or leaving the market. We provide a closed-form solution for the nonlinear evolution of the equilibrium in the sharing economy, typically resulting in an S-curve diffusion pattern. In general, the sharing economy can evolve in a nonmonotonic way, with downward adjustments followed either by a steady state or by a positive diffusion towards a steady state. The conversion costs produce a decision hysteresis for potential sharers. Unless these costs are so large that the economy rests in steady state (almost) immediately, the adjustment process does not converge in finite time. The study implies viability conditions for the sharing economy in the presence of an intermediary. The qualitative results are shown to be robust with respect to changes in the assumptions about price formation and hold even in the limiting case of a frictionless economy with almost immediate price updates.

Keywords: Adjustment Dynamics, Collaborative Consumption, Diffusion Process, Equilibrium Search, Hysteresis, Peer-to-peer Markets, Sharing Economy

JEL Classification: C72, D43, D47, L13, L14, O18, R31