What is a 'Collaborative Economy'

A collaborative economy is a marketplace where consumers rely on each other instead of large companies to meet their wants and needs. Collaborative economies consist of giving, swapping, borrowing, trading, renting, and sharing products and services for a fee, between an individual who has something and an individual who needs something — generally with the help of a web-based middleman. A collaborative economy may also be known as a "shared economy," "sharing economy" or a "peer-to-peer economy."

Breaking Down 'Collaborative Economy'

Essential to a collaborative economy is a company or group acts as a middleman to facilitate consumers’ ability to rely on each other. For example, through Uber, individuals with cars can provide rides to other individuals who want an inexpensive alternative to taxi service; through Craigslist, individuals buy used cars and rent out extra living spaces to each other; and consumers on Etsy buy jewelry and other handmade items from individual crafters. The model behind many collaborative economy businesses may be best exemplified by that of eBay Inc., which has been linking buyers and sellers on the internet since 1995. As a "network orchestrator," eBay creates a peer-to-peer network where participants interact, exchange items or services for money, and create value.

Collaborative economy may be a more accurate term for what may refer to as a "sharing economy," due to the fact that the middlemen that facilitate such economic activity do so for a fee. A 2015 Harvard Business Review article posited that when a market is mediated it is more of an "access economy" than a sharing economy.

Collaborative Economy Examples

Companies in the collaborative economy are often disruptive to established businesses (think Uber and the taxi industry or Airbnb and the hotel industry) and many have experienced rapid revenue growth. They rely on the digital space and smartphone apps to connect buyers and sellers. Online reviews and, in some cases, background checks facilitate trust to make these exchanges possible.

The collaborative economy encompasses many types of businesses. There are services like Taskrabbit which lets consumers hire individuals to complete tasks ranging from running errands to assembling furniture; Crowdfunding services like Lending Club which connect people who need to borrow money with numerous individuals who collectively fund loans; Room rental services like Airbnb that lets property owners earn extra income by renting out their spare rooms or entire homes to travelers; and peer-to-peer marketplaces such as Poshmark, used for reselling high quality used clothing.

Collaborative Economy Challenges

Businesses that rely on customers who buy something rather than share it face a significant threat from businesses in the collaborative economy. Research shows that customers will consider sharing instead of buying if it will result in cost savings of at least 25%, if it is more convenient, or if it offers access to brand-name items. Likewise, sharers can be converted to buyers for the same reasons. Ownership-based companies can join forces with borrowing- or sharing-based companies so that both benefit, for example, specialty grocer Whole Foods’s collaboration with Instacart, a grocery delivery service provided by independent contractors who work on their own schedules.

A big uncertainty surrounding many collaborative economy companies is regulation. Collaborative platforms like Uber and Airbnb have faced well-publicized regulatory battles in numerous cities where their long-established competitors have tried to use fear of consumer harm as a premise, sometimes valid and sometimes overblown, to implement regulations to put these new companies out of business or to make doing business more difficult.

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