Is Airbnb Creating Diseconomies Of Scale?

Is Airbnb creating diseconomies of scale?

In the field of microeconomics, the term “economies of scale” refers to “cost advantages that economic actors realize due to an increase in organizational size or output”. On the other hand, the term “diseconomies of scale” is basically the reverse idea. It’s not actually common to find prominent examples of this concept in the real world – which is what makes Airbnb so interesting.

While examples of the sharing economy in the property rental space are not new (think the boarding / rooming houses of the 1930’s and 40’s), home sharing websites like Airbnb (and others) are providing investment property owners with previously unexpected levels of flexibility, technological / operational efficiency and access to the higher margins of shorter-term stays.

However, what makes Airbnb even more fascinating is the impact it is having on societal preferences when it comes to accommodations, and how those are in turn contributing to diseconomies of scale in the hotel industry. Obviously, when Airbnb was first launched, the main reason travellers were initially attracted to the platform was price. However, over the years it has morphed into a trusted service that offers more than just cheap accommodations. Nowadays, many Airbnb users are often quoted as valuing more than just its affordable prices – they would actually prefer Airbnb over a similarly priced hotel because of the personalized service and the uniqueness of each property. This phenomenon is evidenced by the recent rise in popularity of boutique hotels, which still have the high prices of a traditional hotel, but also offer the personalized service and “charm” of an Airbnb.

The larger a hotel company becomes, the more sensical it is (cost-wise) to standardize and find economies of scale in terms of décor, furnishings, etc … but by doing this, they lose their ability to cater to these two new consumer demands – personalized service and uniqueness / charm.

  • Don’t always track important metrics (since they’re not subject to the level of financial scrutiny that a hotel might be, from shareholders, etc). Specifically, homeowners are not taking certain costs into account (extra electricity, water usage, extra wear and tear on their property, etc).
  • Are not properly taking into account imputed costs or opportunity costs – in other words, they don’t value their time the same way an employee would. This is somewhat justified by the fact that they typically don’t have to travel to get to “work”, don’t pay as many taxes on their Airbnb income, and are not required to remit payroll tax or pay for benefits – all of these savings are essentially shared with the end user, and these are things which hotels cannot compete with.
  • Live either on the property or nearby, which gives them a significant “proximity” advantage that allows them to provide a concierge-like level of 24/7 service that the general manager of a hotel simply cannot match.
  • Ultimately, what we find with Airbnb, like with any other disruptive technology, is that it is fundamentally changing the landscape of its industry (whether intentionally or not).