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Commentary By Jared Meyer

The Sharing Economy Won't Kill the Middleman

Economics Employment

This article is coauthored with Kevin Brocks.

Many people are worried about the effects of technological progress and new business models on their current and future employment. This fear is especially pronounced when it comes to the online platforms that characterize the sharing economy. The taxi industry is furious about consumers flocking to ridesharing services, travel agents feel squeezed by online booking sites and restaurant critics now have to compete with millions of Yelp reviewers.

Online platforms threaten some current business models, and it is natural that older, more expensive services fear a loss of revenue. However, innovation is a welcome feature of capitalist economies, and it is not as apocalyptic as people fear.

There are two specific economic problems that the sharing economy helps to solve: providers have trouble finding customers, and consumers face the difficulty of evaluating the quality of goods and services. These are areas where people functioning as certain types of middlemen typically worked.

In her book The Middleman Economy, Marina Krakovsky defines six types of economic “middlemen.” The middlemen who are the most threatened by the sharing economy’s rise are “bridges,” who reduce high transaction costs, and “certifiers,” who assess quality.

The sharing economy, broadly speaking, is comprised of services that use online platforms to connect people to exchange assets. Now, with the costs of reaching customers and vetting businesses rapidly falling, the sharing economy can reduce the need for bridges and certifiers by having online platforms act in their place.

The sharing economy addresses consumers’ information deficits primarily by using reputational systems. These systems create a wealth of readily available information through the use of consumer feedback. Feedback helps to solve “asymmetric information” problems (where one party in a transaction has access to more information than the other) that were previously addressed by middlemen acting as certifiers. Platforms such as eBay, Uber and Airbnb all have convenient and intuitive reputation-building software that provides a guide to the quality of products or services.

To be sure, this information is not foolproof. Businesses can get their friends to post positive reviews to their site and negative reviews to competitors’ pages. Some riders do not take the time to rate their Uber drivers, or just punch in a five-star rating in order to be able to access their next ride. Some Airbnb guests want to be nice to their hosts so gloss over problems they may have encountered.

However, feedback systems can reduce the middleman role of certifiers as a way to increase trust in the marketplace. When it comes to many goods and services, such as getting a haircut or buying a taco, a growing number of buyers feel that they can trust those who are rated well. (People are obviously not as willing to solely rely on consumer reviews during major decisions such as vetting which brain surgeon to use.) There are still some flaws in rating systems, but platform technologies realize the value of reviews and are constantly working to strengthen their credibility.

The sharing economy’s embrace of feedback systems empowers consumers with information. This may worry some certifiers, as their jobs are being replaced by Internet servers and previous customers from all across the world. But if certifiers can accept that their primary job is no longer reducing asymmetric information, they can use the sharing economy to their advantage.

Certifiers can offer services that Internet platforms do a poor job of providing. Platforms work well when using one-time, undifferentiated services such as hailing a ride. But for more personal, long-term services such as finding a nanny, a simple matching and rating algorithm is not enough to satisfy most people. This means there is still a role in the market for bridge and certifier middlemen to tailor the connection between buyers and sellers. The model “Uber for X” simply does not work across all sectors of the economy.

Instead of simply connecting customers and advertising guarantees for reputable providers, bridges and certifiers can direct consumers toward products of interest. Consider personal travel agents, who were once trusted to secure transportation. Now they are rarely used by individuals, who prefer travel-booking sites such as Orbitz, Kayak and Priceline, and sharing-economy platforms such as Airbnb. But travel agents can adapt and offer full vacation itineraries tailored to customers’ specific interests. Certifiers need to learn from another middleman role that Krakovsky describes, the “concierge,” and work to personalizing bookings and make consumers’ experiences easier.

Though more choice is unquestionably desirable, many consumers do not want or need countless options. Sifting through this information is costly when the search time and effort required for transactions is considered. This presents another chance for displaced middlemen to adapt.

Imagine planning an event, specifically a wedding. Finding the perfect florist, baker and venue is time-consuming and stressful for couples. There are plenty of highly reviewed venues and services. But how can a couple be sure they are making the right choice when choosing between a 4.6-star and 4.5-star business?

This is where there is still a role for wedding planners, who fit various aspects of the bridge, certifier and concierge middleman roles. Couples plan on being one-time customers, but wedding planners are likely to be repeat customers. Because wedding planners are familiar with and knowledgeable of the various businesses used during a wedding, providers have a greater incentive to offer the best service at the lowest price when wedding planners are involved.

By hiring a wedding planner, couples do not have to spend hours combing through Internet platforms that connect businesses to consumers. Instead, they can sit back and trust a professional. The prospect of getting the best deal while saving time is attractive to many consumers, and they are willing to pay for someone to act as a concierge-level bridge and certifier.

The role of middlemen as bridges and certifiers is not going away, but it is undoubtedly changing. Lower transaction costs have empowered consumers and workers alike, leading to the rise of sharing-economy platforms.  While some people view middlemen as nothing more than a pointlessly added expense, when it comes to lowering costs, determining quality and making life easier, bridges and certifiers still clearly play a role in today’s economy. Adaption, not despondency, is the way forward for threatened middlemen.

Jared Meyer is a fellow at the Manhattan Institute for Policy Research, where Kevin Brocks is an intern. Follow Jared on Twitter here.