What Is a Peer-To-Peer (P2P) Economy?

A peer-to-peer (P2P) economy is a decentralized model whereby two individuals interact to buy sell goods and services directly with each other or produce goods and service together, without an intermediary third-party or the use of an incorporated entity or business firm. In a peer-to-peer transaction, the buyer and the seller transact directly with each other in terms of the delivery of the good or service and the exchange of payment. In a peer-to-peer economy, the producer is usually a private individual or independent contractor who owns both their tools (or means of production) and their finished product.

Key Takeaways

  • A peer-to-peer (P2P) economy is one where individuals directly transact business or cooperate in production with each other with little to no intermediation by third parties. 
  • Modern technology has helped to increase the ability of people to engage in P2P economic activity.
  • Factors affecting whether P2P or intermediated economic activity are more likely and efficient include economies of scale, transaction costs, managerial and entrepreneurial specialization, and risk and uncertainty.
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Peer-to-Peer Economy

Understanding a Peer-to-Peer (P2P) Economy

A peer-to-peer economy is viewed as an alternative to traditional capitalism, whereby organized business firms own the means of production and also the finished product. Firms act as centralized intermediaries, selling finished goods and services to customers and hiring labor as necessary to carry out the production process.

A P2P economy can exist within a capitalist economy. Open-source software (which is P2P) co-exists with retail and commercial software. Services like Uber or Airbnb serve as alternatives to taxi and livery services or hotels and inns, respectively. These companies act as hybrids between traditional capitalist firms and true P2P activity by providing intermediary services, including a network to connect buyers and sellers and process payments, but using private contractors to deliver services directly to customers.

In P2P, with no third party involved in a transaction, there is a greater risk that the provider may fail to deliver, that the product will not be of the quality expected, or that the buyer may not pay. Reduced overhead costs and resulting lower prices might defray this extra risk.

Because providers of P2P goods or services own their finished product and means of production, the peer-to-peer economy is similar to the economic production of the pre-industrial age when everybody was a self-producer, a system that was supplanted by more efficient economic systems that provided greater productivity and wealth. The Internet and the IT revolution have made the P2P economy a much more viable system in the modern age, and have also spurred investment in service providers who, while not directly involved in the production of P2P goods or services, act to make P2P transactions more visible, safer, and efficient.

The modern state of emerging P2P economies is just the latest example of the Internet's value to consumers. The emerging Internet-empowered, self-producer model of capitalism is now significant and disruptive enough for regulators and companies to have woken up to it. That is a sign of its immense potential for such innovative business models in years to come.

Capitalist Economy and P2P Economy

Several factors influence the advantages of organizing economic activity into capitalist firms versus P2P economy. In capitalism, workers often do not own the means of production, nor do they have any rights to the finished product they have helped make. Instead, they are paid wages in return for their contribution to the firm's output, which then sells the product to customers. A capitalist system based on third party firms has advantages over a P2P economy in the form of generally increased productivity and efficiency of the production process due to economies of scale, management of the transaction costs of coordinating the activities of buyers and sellers, specialization and division of labor with respect to managerial ability and entrepreneurial judgment, and the transfer of risk and uncertainty from workers and customers onto business owners, who have greater resources to absorb potential losses.

These can represent advantages over a P2P system. A P2P system will be less efficient than traditional capitalist firms to the extent that it restricts production to less efficient scale; incurs higher informational or other transaction costs; limits the division of labor between business managers, entrepreneurs, workers, and customers; or limits the efficient distribution of risk and uncertainty. This extent is based on the physical technology, social institutions, and characteristics of the population in an economy. 

Economies of Scale

The production of some goods and services is more efficient and less costly when they can be produced in large quantities. Firms in a capitalist economy exist partly to consolidate the capital goods and labor needed to produce at large scale into a single location or operation in order to take advantage of these economies of scale. Some modern technologies, such as 3D printing, increase the efficiency of producing certain goods at smaller scales, facilitating the adoption of P2P activity in those markets.

Transaction Costs

The organization of traditional capitalist firms is largely determined by the transactions costs of the various transactions involved in a given production process. Gathering, sharing, and transmitting information about quality, quantity, and the cost of goods, services, and productive inputs; designing, negotiating, and enforcing contracts; and distributing the control of relationship-specific assets are examples of transactions costs that can be reduced by arranging the activities of individuals in an economy into distinct business firms. Where technology, social institutions, or population characteristics can help reduce these kind of transactions costs, business firms may be less needed and individuals can efficiently transacted business on a P2P basis.

Information technology, such as search engines and online marketplace platforms that make it easier for people to gather, share, and filter data about other buyers and sellers, is one obvious avenue for facilitating P2P activity, while formal institutions, such as a reliable system of contract and tort law that increases the ability of individuals to make and enforce business contracts or antitrust statutes that limit the ability of large firms to exercise market power to demand concessions from smaller counterparties, are another. A population of buyers and sellers with a higher social preference for trust and fairness may also be less reliant on organizing business firms to overcome transaction costs associated with information asymmetries, principal-agent problems, and hold-up over relationship-specific assets. 

Specialization and Division of Labor

Business firms that act as economic intermediaries economize on the use of managerial skill and entrepreneurial judgement. They allow those who have these abilities to specialize in applying them productively and those who do not have them to specialize in other activities as wage- or salary-paid employees. A P2P economy can be more successful where there are technological tools that make it easier for individuals to manage their own business and workload and to reduce the comparative advantage of specializing. A population of individuals who, for whatever reason, happen to have a better degree of management skill or entrepreneurial judgement may be more suited to benefit form a P2P economy.

Risk and Uncertainty Bearing

Future economic conditions are always uncertain and involves risk. Consumer preferences change, natural disasters occur, and economies undergo business cycles and recessions. Business firms in a traditional capitalist economy bear these risks and uncertainties by being responsible for the profit or loss of the business, while providing workers with a stable wage and consumers with a consistent product. In P2P economic activity, without a business firm acting as intermediary, individuals bear more of the direct risks of running their own business and directly suffer losses if uncertain economic conditions turn against them. Social institutions such as a universal basic income, single-payer healthcare, or other social safety nets could allow greater P2P economic activity by increasing individuals' ability to bear the risk of being in business for themselves. A population of people who are simply more tolerant of uncertainty and willing to take greater risks might also be more likely to be suited to P2P economy.