“Shared bikes hunters,” a group of volunteers protecting shared bikes, team up to “rescue” bikes from misconduct or move them to the right places. (PHOITO: CFP)

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Since more than 2,000 shared bikes made their debut on the campus of Peking University in May 2015, they have swept across China and even made their way abroad. It is the first business model to originate in China and expand around the world.

According to the employment report released by the National Information Center this September, by July 2017, about 16 million shared vehicles had entered the domestic market, creating 100,000 jobs. In the first half of 2017, bike-sharing enterprises recruited about 70,000 people, accounting for around 1 percent of China’s new urban jobs in the same period.

The report also notes that China’s shared bikes are used around 50 million times daily and each bike is used about three times on average. By June 2017, the number of domestic shared bikes users had reached 106 million. In the first half of the year, bike-sharing firms became the most prolific fundraisers in the sharing economy sector with 22 rounds of financing, and they raised a total of 10.43 billion yuan ($1.56 billion).

The bike-sharing boom has caused a stir at home and abroad. How has the industry achieved such rapid growth? What significance does it have for the study of economics? How should the disputes it causes be viewed?

 

Cost benefit analysis
In reality, bike rental is nothing new, but prior to the internet era, it was not as popular as it is today due to high costs. The internet, however, saves costs and enhances benefits for both consumers and manufacturers.

For consumers, bike rental costs exceeded the benefit before the internet era. It required extra time and energy to deal with rental. Users incurred costs for the bike even when they were not using it and they were liable for losses or damages. Also, bikes’ limited range meant that the benefits seldom outweighed the cost.

Therefore, though the cost-benefit equation was far from ideal, purchasing a vehicle remained a reasonable choice. 

However, with the aid of the internet, users can park wherever it is convenient, so it has made all the aforementioned costs disappear. And, the price for the service has been cut down by a large margin or even reduced to zero under certain circumstances, thanks to the information and capital-sharing effect. Naturally, renting a bike has become a much better choice than owning one in today’s world.

For service providers, the internet helps to reduce the cost of storage and information maintenance while enlarging rental income, down payment pool and user information revenue. Thus, the industry has begun to boom.

 

Study of economics
The bike-sharing business model has brought several fundamental changes to the study of economics.

For one, it has promoted the division of labor and specialization. Before shared bikes, the maintenance and other related work of a bicycle was the responsibility of the consumers, which is obviously an integrated state rather than a division and specialization. With shared bikes, consumers are only responsible for use, whereas maintenance, parking, safety and other problems are dealt with by professionals, increasing efficiency.

Second, it has resulted in an economy of scale. Since the ownership of bicycles has shifted from individuals to large corporations, bicycle design has been simplified, making possible an economy of scale. In addition, specialization in the rights of use and maintenance has also brought about a scale effect.

Third, bike sharing in the internet era is accompanied by information sharing, which also has the potential to become a new factor of production and drive economic growth. With a traditional private bike or an old-fashioned bike rental, it is difficult to acquire information about users and their routes or to translate that data into useful resources. Shared bikes are integrated into the internet, so they can reveal massive amounts of information and data from the user’s registration and the cycling route at a low cost or even at zero cost. This aggregation of information can be the basis for efficient analysis, driving a new round of economic growth.

 

Sharing economy in China
The mobile payment system based on the smartphone technology is the fundamental basis for the sharing economic model and in this field, China is a world leader. China’s gross domestic product (GDP) is now around two-thirds that of the United States, but in 2016, China’s mobile payment volume grew to 50 times that of the US. Some say China has achieved a cashless society to a certain degree, which in turn provides the technical support for the bike-sharing business model.
 

 

With the world’s largest 4G network, consisting of more than 2 million base stations serving more than 500 million users, China is home to the world’s largest number of internet and mobile internet users, and it has also spawned a number of internationally competitive enterprises.
At the same time, its unique national conditions—a middle-level average per capita income and the second-largest GDP—make China particularly suitable for the development of a shared economy.

China’s relatively lower per capita income means that many Chinese cannot afford high-end products, but if the product is shared, it can reach a gigantic market.

Take for example a shared luxury car. A middle-income person could not dream of owning a luxury car, but if three middle income people could share it, they might create a demand for the car. This huge market would not only encourage enterprises to compete to improve service efficiency, forming a benign competitive environment, but it can also ensure that enterprises achieve sufficient economies of scale.

Not to mention that China is heavily populated, in particular in cities, which means the cost of sharing is low and the services could become non-stop, thus reducing idleness and waste.

 

Going forward
Many of the problems that arise in the development of the shared economic model are normal, such as the flooding of streets with bicycles brought by the glut of manufacturers. Given the key advantage of shared bicycles lies in easy access, manufacturers strive to make their own brand of bicycles ubiquitous, generating fierce competition for territory.

For this type of quantitative competition, the market will offer an answer with profit. As competition becomes more intense, the cost of competition between manufacturers will go up, and there will be a market exit.

However, if the number of bikes continues to increase and companies over-exploit the zero cost of public space, it will result in “the tragedy of the commons.”

In the case of market failure, the government could step in and take measures to regulate the industry. The first move is to charge “parking fees,” reflecting the scarcity of public parking resources, increasing the cost of entering the market, and reducing the total amount of bicycles. Second, based on total urban population, population density, bike use and several other indicators, the government could reasonably estimate the total amount of bicycles a city could handle and impose a cap on the number of bicycles. Third, the government could implement a bicycle carbon trade system.

There is also the chance of consumers using bikes unscrupulously. For example, some users destroy bicycles, or break the lock to make the public shared bikes their personal property. These problems cause direct losses for the manufacturers. Therefore, the market should be able to provide some solutions along the way.

At the same time, society has also put forward some plausible solutions that we did not think of in the first place. For example, there are young people playing “shared bike hunters,” who take it upon themselves to maintain order and “let the next person have a bike to ride.”

 

Luo Libin is an associate professor at the School of Economics, Trade and Event Management at Beijing International Studies University.