Airbnb Case Study

Airbnb has achieved immense success since the company was founded in 2008. The firm has expanded to more than 190 countries and is currently valued at approximately $30 billion (Thompson et al. 6). However, the case study highlights some of the issues faced by Airbnb and the industry as a whole. Among the problems outlined in the case is the notion that the business model for the sharing economy has enabled industry players such as Airbnb to conduct business unfairly (Thompson et al. 9). Local and global companies have criticized Airbnb and its users for not complying with lodging regulations. For instance, some Airbnb guests have faced discrimination from hosts in one way or another. Also, the sharing economy business model has exposed hosts to legal and financial problems, such as guests refusing to leave or damaging hosts’ properties and rooms (Thompson et al. 9). Moreover, hosts might also face legal problems in case of harm or death of a lodger.

            Another issue underlying the case is that some operators have been using Airbnb platform to own and conduct accommodation business without obtaining proper licenses (Thompson et al. 9). By using Airbnb marketplace, such traders have been able to operate and generate revenue without abiding by the regulations or reporting income for taxation. As a result, brick-and-mortar establishments have been pushing the government to level the playing field through rules. Changes in consumer preferences is also an issue that is widely seen as an opportunity by the primary actors in the case (Thompson et al. 8). For instance, based on the information from the case study, there is a growing need among customers to share or rent rather than to own an asset.  In other words, asset ownership has been deemphasized. The desire for a community and a closer relationship with the host is also another change in buyer preferences that players such as Airbnb see as an opportunity (Thompson et al. 8).

Challenges Facing Airbnb Today

There is no doubt that Airbnb has become a vehicle for mass tourism, and that most of its users are vacationers. However, this new development has come with its challenges. For instance, Airbnb has been criticized for becoming a double-edged sword (Slee). Even though visitors get new experiences and bring in money, they erode the very surrounding in which they bask and threaten the livability of cities for inhabitants (Slee). With more tourists coming in, some cities are becoming deserted. Smaller communities are also facing problems of scale when it comes to Airbnb (Slee). For instance, locals are faced with the challenge of finding homes to rent, as more properties are being made available for Airbnb rentals. Moreover, house prices are increasing since people are now buying homes to rent out as vacation rentals. As a result, it has created a reputation challenge for Airbnb with some city residents criticizing the company for their housing woes (Slee).

            The growing competition is also another challenge facing Airbnb today. The increasing number of Airbnb replica companies such as onefinestay, Homestay, and Oasis Collections is a current development that could hinder the firm’s growth prospects unless there is a quick response (Foo). The difficulty in appealing to the lucrative customer segment of the business travelers is also another challenge Airbnb is facing today (Foo). The matter has been complicated further by the question of the legality of Airbnb business model (Guttentag 1203). Also, Airbnb has not yet achieved greater efficiency that could appeal to a large section of lucrative customer segment of the business travelers (Guttentag 1205). How Airbnb manages to address such challenges will depend on whether the firm continues on the same pathway of transformation it has undergone in the past, or whether the company decides to change tactics.

Evaluation of the Regulation Issue

As mentioned above, the call to create to a level playing field in the hotel and accommodation industry is a challenge facing Airbnb. This assertion is influenced by regulation theories, which emphasize the importance of market and industry rules. For instance, the public interest concept of regulation asserts that the market power of firms must be controlled (Van and Walton 218). The theory works on the assumption that regulators seek to find economically efficient marketplace solutions. Also, the concept works on a supposition that regulation can prevent cutthroat competition, which is not ideal to the public (Van and Walton 218). The assumptions underlying the public interest theory apply in Airbnb case in the sense that the company has not complied with all market rules, thereby reducing market efficiency (Guttentag 1204). For instance, the fact that operators use Airbnb’s less regulated platform to conduct accommodation business and generate revenue by charging remarkably lower prices could be a cause for marketplace inefficiency. Consumer protection is also another concept that influences the assertion that regulation is an issue affecting Airbnb. The idea works on the assumption that customers need to be protected from unsafe products and unscrupulous sellers (Van and Walton 218). The theory of consumer protection applies in Airbnb case in the sense that guests might be exposed to discrimination and harm due to inadequate regulations.

            From the perspective of traditional brick-and-mortar establishments, there is enough evidence to support the claim that insufficient regulation of Airbnb is indeed an issue. For instance, Airbnb is already winning guests from hotels that serve the lower end of the market due to lower prices charged by Airbnb hosts, a development some players attribute to Airbnb’s unfair advantage (Horton and Zeckhauser 21). In cities such as Berlin and, New York Paris, the cost of average Airbnb stay is almost half that of the traditional hotel rooms (Brook). Also, the entrance of Airbnb has led to a reduction of revenue by as much as 10% in specific market segments (Horton and Zeckhauser 21). Furthermore, in a field study on Airbnb, it was revealed that requests from guests with characteristically Black-American names are approximately 16% less probable to be accepted in comparison to visitors with uniquely white names (Edelman et al. 3).

            The above evidence is an indication of how the sharing economy has impacted the hotel and hospitality industry. At the same time, it gives a glimpse of future implications and expected consequences. For instance, the growth of the sharing economy implies that more traditional hotels will continue to lose a significant amount of revenue to companies such as Airbnb unless there will be a useful strategic response (Guttentag 1204). The evidence also infers that guesthouses that serve the lower end of the market will be affected more compared to large hospitality companies. Consequences of such eventualities might include loss of employment and livelihoods. However, a section of the population, for instance, Airbnb hosts might benefit from an increase in income. At the same time, it can be argued that price war might lead to a reduction in hotel prices (Guttentag 1205). For instance, some hospitality companies might reduce their room prices to maintain their market share. Finally, based on the above evidence, there might be a change in industry rules, with regulators mainly targeting businesses in the sharing economy.

Recommendation

To address the above issues, Airbnb can proactively regulate itself. The company can do many things to conform to local laws and market regulations. For instance, Airbnb can work with various cities to register all hosts who want to use the company’s platform automatically under short-term rental provisions (Guttentag 1203). The company can also offer its users with an improved digital reputation system based on comprehensive post-transaction assessments. Airbnb can also regulate itself by coming up with an enhanced identity verification systems, which combine the digitized social capital of other media platforms such as Facebook or LinkedIn with the current government identification infrastructure. As a result, it would go a long way in improving identity verification process, which reduces the risks of market failure by making users feel safer (Guttentag 1203). Such a system can also aid in lowering cases of discrimination. The company can also actively scrutinize users to ensure that the firm’s supported activities are in line with the lodging industry regulations and requirements (Guttentag 1203). For instance, Airbnb can come up with instant user feedback that assesses both users and hosts’ activities.

            The positive implication of self-regulation is that Airbnb will avoid operating under the rules imposed by large incumbent industry players while ensuring that the company has a good compliance record (Guttentag 1203). At the same time, it will provide Airbnb with an incentive and the opportunity to innovate more as a way of enhancing the firm’s business model and increasing customer safety (Guttentag 1203). However, self-regulation can also lead to a conflict of interest, more so when the concern of the company and other stakeholders are different, thereby negating its effectiveness.  

Works Cited

Brook, Benedict. “Price difference between hotel rooms and using16 Airbnb in Australia among world’s lowest.” news.com.au, 11 Mar. 2016, www.news.com.au/travel/travel-advice/accommodation/price-difference-between-hotel-rooms-and-using-airbnb-in-australia-among-worlds-lowest/news-story/dac160de74cee366e793fa109bdbdcdd.

Edelman, Benjamin, et al. Racial discrimination in the sharing economy: Evidence from a field experiment. Harvard Business School, 2016. www.hbs.edu/faculty/Publication%20Files/16-069_5c3b2b36-d9f8-4b38-9639-2175aaf9ebc9.pdf.

Foo, Aaron. ”Challenges facing Airbnb.” The Online Economy: Strategy and Entrepreneurship, 2 Nov. 2015, www.onlineeconomy.org/challenges-facing-airbnb/index.html.

Guttentag, Daniel. ”Airbnb: disruptive innovation and the rise of an informal tourism accommodation sector.” Current Issues in Tourism, vol. 18, no. 12, 2013, pp. 1192-1217.

Horton, John, and Richard Zeckhauser. ”Owning, using and renting: Some simple economics of the ”Sharing Economy.” National Bureau of Economic Research, 2016, pp. 1-44, www.nber.org/papers/w22029.

Slee, Tom. ”Airbnb is facing an existential expansion problem.” Harvard Business Review, 11 July 2016, hbr.org/2016/07/airbnb-is-facing-an-existential-expansion-problem.

Thompson, Arthur, et al. ”CASE 02 Airbnb in 2016: A Business Model for the Sharing Economy.” Crafting and executing strategy: The quest for competitive advantage: Concepts and cases, 21st ed., McGraw-Hill, 2017, pp. 6-9.

Van, Mourik C, and Peter Walton. The Routledge Companion to Accounting, Reporting, and Regulation. Taylor and Francis, 2013.