NBER WORKING PAPER SERIES PEER-TO-PEER MARKETS. Liran Einav Chiara Farronato Jonathan Levin. Working Paper

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1 NBER WORKING PAPER SERIES PEER-TO-PEER MARKETS Liran Einav Chiara Farronato Jonathan Levin Working Paper NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA August 2015 We appreciate support from the National Science Foundation, the Stanford Institute for Economic Policy Research, the Toulouse Network on Information Technology, and the Alfred P. Sloan Foundation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications by Liran Einav, Chiara Farronato, and Jonathan Levin. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including notice, is given to the source.

2 Peer-to-Peer Markets Liran Einav, Chiara Farronato, and Jonathan Levin NBER Working Paper No August 2015 JEL No. D02,D47,L86 ABSTRACT Peer-to-peer markets such as ebay, Uber, and Airbnb allow small suppliers to compete with traditional providers of goods or services. We view the primary function of these markets as making it easy for buyers to find sellers and engage in convenient, trustworthy transactions. We discuss elements of market design that make this possible, including search and matching algorithms, pricing, and reputation systems. We then develop a simple model of how these markets enable entry by small or flexible suppliers, and the resulting impact on existing firms. Finally, we consider the regulation of peer-to-peer markets, and the economic arguments for different approaches to licensing and certification, data, and employment regulation. Liran Einav Stanford University Department of Economics 579 Serra Mall Stanford, CA and NBER leinav@stanford.edu Jonathan Levin Stanford University Department of Economics Stanford, CA and NBER jdlevin@stanford.edu Chiara Farronato Stanford University Department of Economics 579 Serra Mall Stanford, CA chiarafarronato@gmail.com

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32 FIGURE 1: Spot Market with Dedicated and Flexible Sellers Price Supply with only dedicated sellers Supply with dedicated and flexible sellers c 0 D High (p) D Low (p) Q k Q k +Q c

33 FIGURE 2: Equilibrium Market Structure Q k U c (Q c,q k )=0 Both Seller Types Unprofitable (Q c *,Q k *) Both Seller Types Profitable U k (Q c,q k )=0 Q c

34 FIGURE 3: Equilibria with a Peer-to-Peer Platform Q k Q k * U c =0 Q c