Airbnb undermines the distinction between short-term, "hotel", accommodation and and long-term, "apartment" accommodation. Some people seem to figure this is a bad thing. New York State legislators, for example, have passed legislation imposing heavy fines on anyone listing their entire apartment on Airbnb or a similar service. But what – if anything – is wrong with what Airbnb is doing?
The distinction between hotels and apartments has always been artificial. Even before Airbnb, people turned their homes into bed and breakfasts, and other types of small hotels. Similarly, hotels have been used for long-term accommodation, either by individuals choosing hotels as their long-term residence, or by companies who have converted whole hotels into student residences or assisted living facilities.
The artificial segregation of the rental market into hotels and apartments evolved, and has been maintained, because market segmentation has been both possible and profitable. The hotel market separates itself from the apartment market through the services it offers (providing daily housekeeping instead of a washing machine), the terms on which it makes accommodation available (no background checks on tenants), and the prices it charges.
Such segregation is profitable because some short-term renters have a high willingness-to-pay for accommodation, and inelastic demands – people travelling on business for deep-pocketed employers, for example, or rich people on vacation. Long-term renters, on the other hand, tend to have less ability to pay for accommodation – if they were rich, they would in all likelihood be home owners not tenants. The price differentials between short-term and long-term renters have not, traditionally, been competed away, because both markets have been characterized by monopolistic competition, with the hotel market, especially, having significant barriers to entry. (Indeed, the hotel industry might be closer to an oligopoly).
The figure above shows an accommodation market segregated into short-term and long-term markets. In each market, landlords decide how much to provide by setting marginal revenues to marginal costs. They decide how much to charge by figuring out the maximum amount consumers are willing to pay for that profit-maximizing quantity. Landlords charge less for long-term accommodation, because that is all the market will bear; they charge more for short-term accommodation, because they can.
As an aside, landlords are not the only ones to take advantage of short-term renters. Cities also impose special taxes on short-term accommodation - hotel levies of one form or another. These taxes can be justified as a reasonable user fee for tourists’ use of city services, as an efficient way of raising revenue, or as a politically attractive "tax exporting" strategy, that is, a way of shifting taxes to people outside the local area. Whatever the reason, such taxes will create a wedge between the cost of short-term and long-term accommodation, leading to even greater price differentials than are shown in the diagram above.
Airbnb has disrupted the rental accommodation market by undermining the clear separation between the short-term, hotel, market and the long-term, apartment, market. The effect of this is shown in the figure below. When short-term renters move into the apartment market, the demand for apartments shifts upwards, outwards, and becomes less elastic, as shown in the shift to the new, red, demand and marginal revenue curves in the figure below. The quantity of apartments rented out should increase, to the extent that the supply of apartments is at all elastic. However, given that the supply of apartments is relatively inelastic, much of the impact of new customers coming into the apartment rental market will be felt in the form of higher prices, not greater quantities.
The notion that Airbnb drives up rents is widespread. What is less often discussed is the flip side of Airbnb’s market disruption - as short-term renters leave the traditional hotel market, the demand for hotel-type accommodation should decrease - again, shown by the new, red, demand and marginal revenue curves in the figure below. Hotel prices will fall, and/or the quantity of hotel rooms sold will decrease – resulting in more hotel rooms standing empty, or hotels being converted into other forms of accommodation.
The point is that Airbnb does not reduce the total supply of rental accommodation. If anything, by reducing the costs to homeowners of making rooms available for rent, Airbnb increases the total supply of rental accommodation.
The impact of Airbnb is, first of all, distributive: it does not decrease the accommodation stock, but it changes how that stock of accommodation is allocated. More of the accommodation stock goes to short-term visitors – to tourists, to business travelers, to people who already own a home elsewhere. Less of the stock of accommodation goes to lower-income locals.
Airbnb is also redistributive: travelers benefit from lower prices, while local long-term renters pay higher ones. Owners of the existing hotel stock are worse off; owners of the existing apartment stock are better off. Overall, it’s really hard to say whether the net impact of Airbnb is to reduce overall income and wealth inequality or increase it. To the extent that Airbnb diminishes the Hilton family fortune, while making it cheaper for tourists from Tulsa to visit New York city, it may actually reduce inequality in income and wealth.
The intractable problem that Airbnb does, potentially, exacerbate, is the inability of low-wage workers to find affordable accommodation in cities like New York and San Francisco. But this is hardly a novel problem. Low-wage workers struggle to afford root canals and arthritis medication; they struggle to pay for fresh fruit in winter and kids’ camps in summer.
There are a standard set of solutions for dealing with the gap between people’s incomes and their needs: Income supports, such as the Canada Child Tax Benefit, disability benefits or, in the US, the Earned Income Tax Credit. Minimum wage legislation. Subsidies, such as child care subsidies, or rent supports. Public provision or public finance of goods and services – publicly financed or provided housing, for example.
Why is the New York legislature restricting Airbnb rather than subsidizing accommodation for low income workers, raising the minimum wage, or enhancing income supports?
Well, it’s a lot cheaper to begin with, and it sure would make some hotel owners happy….