Sharing economy and quality competition among traditional service providers

We investigate the impact of the sharing economy on the quality of service offered by traditional businesses in the hospitality industry, on their profitability, and on societal welfare. We conduct the investigation in a market consisting of two different quality class hotels (high and low) prior to the entry of a peer-to-peer lodging platform and a population of consumers having different income levels. We find that for relatively poor economies, the sharing economy leads to higher prices, quality, and profits for both low and high class hotels. In contrast, the sharing economy may be detrimental to both hotels for relatively rich economies. In other cases, the sharing economy may introduce different effects on the behavior and fortunes of different classes of incumbent lodging suppliers. For instance, price and quality of low class accommodations may decline, whereas, interestingly, the price of high class accommodations may rise upon the emergence of a sharing platform, in spite of a decrease in quality. Moreover, while the sharing economy unambiguously increases aggregate consumer welfare, there are instances when consumers choosing high class accommodations are worse off after the entry of the sharing platform. Finally, we find that the total societal welfare does not always increase.