Airbnb And Other Services Have Embraced A winning Economic Model

By Jeremy Rifkin
Los Angeles Times.

Airbnb is all the talk on Wall Street. Its thirtysomething founders were nearly broke six years ago. Now it seems likely they will soon become billionaires.

Their company, which connects 600,000 apartment dwellers and homeowners in 160 countries with millions of people seeking cheap lodging online, is closing a new round of private funding, and it is expected to be valued at $10 billion or more by the end of April.

In one night alone during 2013, Airbnb boasted 250,000 guests staying in its members’ apartments and houses. The home-sharing service is already approaching the worth of some of the biggest hotel chains in the world, including Hyatt Hotels and Wyndham Worldwide.

Airbnb owes its meteoric rise to a new phenomenon, near zero marginal cost, which is disrupting entire sectors of the global economy and giving rise to a new economic system riding alongside the conventional market.

Marginal cost is the cost of producing an additional unit of a good or service once a business has its fixed costs in place, and for businesses like Airbnb, that cost is extremely low.

It’s not difficult to see why the service has soared in value.

For a traditional hotel chain to add another room to its inventory, the room must be built or acquired, at a significant cost.

Airbnb can add another room to its inventory at almost no cost, since its website is already up and running.

Private enterprises have every incentive to reduce their marginal costs. Doing so means they can increase profits, offer goods and services at a lower price, or both. But now the Internet and other innovations have reduced marginal costs to near zero for some commodities and services, which has left many traditional companies reeling.

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