The Model of Indirect Pricing Transactions and the New Boundaries of the Sharing Economy

Ge Jun, and Guo Yukuan

TOJOY Holding Group

Abstract: In recent years, the sharing economy has become more prevalent in many lives.While bringing convenience to the public, it has also improved resource efficiency, thus gradually driving economic development.By studying indirect pricing transactions, the authors have discovered a new sort of sharing economics which may be able to resolve the issue presented by intangible assets (such as entrepreneurship) and provide new ideas for addressing social problems.Compared with the traditional sharing economy, this new economic pattern has wider potential utility.The authors hold that their indirect pricing theory establishes the theoretical foundation of new sharing economics, while the model of indirect-pricing transaction extends the boundaries for the existing sharing economy.

Keywords: sharing economy, indirect pricing, new sharing economy, new economic pattern

Limitations of Traditional Sharing Economy Theory

Traditional sharing economy theory, derived from cooperative consumption of goods and services, was proposed by Marcus Felson and Joe L.Spaeth (1978), professors of sociology at Texas State University and University of Illinois respectively in their paper—“Community Structure and Collaborative Consumption: A Routine Activity Approach”.

In the paper, Felson and Spaeth presented that a technology-enabled platform could be created by a third party that enabled pricing control and cooperative listing and consumption of goods and services.In recent years, some sharing economy enterprises have emerged, supporting the basis of this theory.These companies have provided sharing services for bicycles, apartments, car usage, and more, all with the support of technology-enabled platforms (Felson & Spaeth, 1978).

However, limitations to the traditional sharing economy model have been identified.For example,compared with traditional taxi companies, Uber has improved the efficiency of taxi allocation through its online car hailing platform.However, the platform did not fundamentally change the nature of hired car usage, which can be attributed to the boundaries of the traditional sharing economy.

Dilemma of Transaction Cost in the Traditional Sharing Mode

Coase R.H.(Coase, 1937) postulated that transaction cost theory may explain the essence of enterprises: if the transaction cost in the market rises too high, it can only be reduced through an internalized enterprise mechanism.By entering into an indefinite, semi-permanent, hierarchical relation, in other words, integrating all kinds of resources into an organization (for example, enterprises themselves), subcontracts of certain investments in the market can be reduced.

With the change in economic activities, more transaction parties are getting involved, and the transaction structure is more complex than before, making the hidden costs between enterprises and external transaction parties rise.However, the sharing economy emerging along with the internet and big data has reduced transaction links and information asymmetry, while improving transaction efficiency among large transaction parties.Thus, the sharing economy has reduced the overall transaction cost of economic activities.

The traditional sharing mode mainly involves the sharing of physical property, however, it may still be hard to break through the dilemma of transaction costs once beyond the range of physical property sharing, for categories such as information, coordination, supervision, and operation costs.

Information costs include direct expenditure for basic technical information searches, investigation,and costs for correcting errors.Coordination cost mainly refers to the cost incurred between the platform and other stakeholders, such as the cost generated during negotiations with the government.As to the supervision cost, since the current sharing mode is not yet mature, supply and demand parties (on the sharing platform) may have poor compliance with the rules of the platform.It is necessary to provide supervision and management by the operator or a third party.Operation costs are incurred by investing human, material, and financial resources in order to maintain the operation of the platform.

These transaction costs come from the transaction difficulties brought about by market failure that form under the interactive influence of human factors and environmental factors during the transaction(Williamson, 1975).Williamson O.E.points out six sources of transaction costs:

1.Bounded Rationality: Refers to the restriction imposed by the participants in transaction in the pursuit of maximum benefits due to their physical, mental, intelligent, emotional and other limitations.

2.Opportunism: Refers to the fraud committed by the parties to the transaction in order to pursue selfinterest, which intensifies their mutual distrust and suspicion at the same time, consequently increases the cost of monitoring the transaction process and reduces economic efficiency.

3.Uncertainty and Complexity: When there are unpredictability and various changes in the environment, both parties prefer to incorporate future uncertainty and complexity into the contract, which increases the bargaining cost in the transaction process and makes the transaction more difficult to carry out.

4.Specific Investment: Due to the proprietary reflected in some transaction processes, or the idiosyncratic information and resources that are hard to circulate, there will be fewer transaction objects and the market will be controlled by the minority, resulting in market failure.

5.Information Asymmetry: Both parties to the transaction may acquire information at different degrees because of the environmental uncertainty and opportunism generated by self-interested behavior,which makes the first mover in the market command more favorable information.They benefit from it,and only a few transactions can be achieved.

6.Atmosphere: If the two parties to the transaction do not trust each other and rather stand opposed,it is impossible to build a satisfactory relation.This will result in a meaningless transaction process and increased unnecessary difficulties and costs.

Underlying the dilemma of high transaction costs caused by the above six factors is the difficulty in pricing a transaction object.If the price can be clearly set, money can solve a variety of problems, and all the above difficulties can be overcome.The fact that traditional sharing is mainly constrained to physical property reflects the relatively easy pricing of physical property that is tangible and quantifiable, and its price can be settled through calculation regardless of pricing method.For this reason, the traditional sharing mode allows for direct pricing.On the other hand, property rights and rare resources that can produce higher transaction value, such as entrepreneurship, intellectual property rights and market resources, are difficult to trade, because these intangible resources are difficult to quantify.Without quantification, it is impossible to price directly and satisfy both parties to a transaction.

Such dilemmas lead to difficulty in concluding transactions.This is ultimately attributable to the difficulty in pricing the above six factors within a transaction structure.Generally, pricing a risk is achievable.Insurance companies, for example, often operate based on risk-taking considerations determined according to probability statistics.However, in a specific non-standard transaction, it would be unlikely for both parties to agree on the direct transaction price due to the existence of risk and information asymmetry during the transaction.

Indirect Pricing Theory and the Model of Indirect Pricing Transactions

Coase (1937) pointed out in his paper “The Nature of the Firm” that the boundary between enterprises and market lies in the transaction cost.When the transaction cost rises, enterprises will introduce a competitive allocation of resources in order to win in their market (Coase, 1937).

Steven N.S.Cheung (1983) argued in his paper “The Contractual Nature of the Firm” that enterprises,supplant product-focused services with factor or supply-based services, facilitating an indirect pricing method based on enterprises’ residual rights to replace direct pricing methods in the market rather than intend to replace existing markets.The difference to the consumer has shifted from new enterprises versus legacy market players, to individual products and services versus an array of choices afforded through direct interaction with the factor market (Cheung, 1983).

In 1993, X.K.Yang and Y.K.Ng of Monash University proposed indirect pricing theory, in their jointly published book Specialization and Economic Organization.

Yang and Ng’s theory builds on the theories of Coase (1937) and Cheung (1983) based on three factors: Consumers, economic specialization, and transaction cost.From these, a contractual model of general equilibrium of enterprises is established, uniquely linking the structure of enterprise ownership to pricing, and connecting the balanced organizational form of the enterprise to its transaction efficiency.Yang and Ng argue that enterprises have moved into a self-regulating manner of transaction through indirect pricing, one that recognizes the high transaction costs of certain activities, such as the production of management knowledge, while not necessitating a division of labor or assigning direct pricing on these activities.They also argued that if there is an open competition environment, indirect transactions will naturally discourage exploitation, and will become a propeller of economic growth.

According to Yang and Ng’s theory, a model for factor transaction can be outlined.

Suppose there are two groups of producers equipped with different knowledge: One in clothing manufacturing processes (the “clothing producer”), while the other acquires the management knowledge related to clothing manufacturing (the “management knowledge producer”).

If the efficiency of transaction between such two kinds of knowledge is low, people will produce them on their own, which means, the worker will have to both produce management knowledge by himself and utilize that knowledge to make clothes at the same time.Such production modes do not incur any transaction cost.However, due to the lack of division of labor and specialized production, their productivity remains low.

If we can improve transaction efficiency to ask some workers to focus on producing management knowledge, and keep others available to utilize that management knowledge to produce clothes, then productivity can consequently be improved because of the division of labor and specialized production.To this end, there are three modes of collaboration to organize labor division.

In the first mode the management knowledge producer sells his/her management knowledge to the clothing producer as a kind of consulting service, and then buy clothes from the latter.In such a case, two markets can be formed: the management knowledge market, and the clothing market.Since there is no labor transaction, authority and residual claims are symmetrically allocated, and no enterprise appears.

In the second mode clothing producer employs the management knowledge producer to produce management knowledge, then the clothing producer uses that knowledge to make clothes.In such a case,there will be a clothing market and a labor market to produce management knowledge.

The third mode sees the management knowledge producer employ the clothing producer and ask thelatter to use the management knowledge produced by the former to make clothes.In such a case, there will be a clothing market and a labor market for clothing manufacturing.

As mentioned above, the last two modes or transactions are indirect transactions.Such transactions are asymmetric allocations of authority and residual claim, because, instead of the employees, it is the employers who have the authority to manage the workers they hire and enjoy the residual claims.For this reason, enterprises grow from these modes.In addition, both modes use labor transaction to replace the transaction of product and management knowledge.

The Model of Indirect Pricing Transactions and the New Boundaries of the Sharing Economy

Indirect pricing theory plays a role in the theoretical basis of expanding the boundaries of the sharing economy.We propose an extended model based on the “Yang-Ng Model.”

Suppose the enterprises generated by the latter two modes of cooperation under the framework of the Yang-Ng Model have generated both sufficient knowledge and capacity to produce clothes efficiently, but do not know how to sell clothes; and suppose another sort of enterprises generated under the framework of the Yang-Ng Model have the knowledge and ability to sell clothes, but do not know how to make clothes.In such a case, how can the enterprises with the knowledge and ability to make clothes collaborate with those with the knowledge and ability to sell clothes? We argue this can be realized through direct transaction, where both parties directly buy the products or services from each other.In addition, another two modes of indirect transaction based on the same logic as above are also applicable.

When it comes to this collaboration, the process of establishing a platform to promote indirect pricing and indirect transaction represents a new kind of sharing economy.Compared with the traditional sharing economy, we can see that the new sharing economy has broader characteristics.

The traditional sharing economy, in facilitating goods or services transactions, must rely on internet platforms to conduct direct pricing and direct transactions.For example, Uber is a transaction platform for car services and its transactions can be considered as direct pricing and direct transactions.Airbnb as a transaction platform for apartment services also offers a kind of direct pricing and direct transaction.

However, the new sharing economy promotes a sort of “joint venture,” “consortium,” and “market lock-in” among entrepreneurs.The essence is to facilitate indirect pricing and indirect transaction of some elements that can be difficult to achieve through direct transaction methods, such as entrepreneurship,market resources, intellectual property rights, etc.In fact, the new sharing economy is the extension of indirect pricing theory.

What are the benefits of this new sharing economy based on the model of indirect pricing transaction?In fact, direct pricing is far from an efficient contractual model in some cases.For example, it is easy to determine the service charge of a cab driver through direct pricing, but one can barely buy the knowledge and creative ability of inventors like Edison or Tesla, or measure the entrepreneurship of Zuckerberg or Ren Zhengfei by price.As it is for the influence of business leaders, whose value may never be measuredby price.Therefore, the prices that cannot be assigned by direct pricing can only be assigned through indirect pricing.The new sharing economy can reflect these elements in the form of price and ultimately facilitate such transactions.

According to Baumol, W.J (2010), entrepreneurship is so important that it should be praised as the “soul” of boosting innovation.In contrast, within the analytical framework of classical economics,entrepreneurship is excluded from the primary categories of production factors, which consists only of land, labor and capital.Such facts can be attributed mostly to the awkward role of entrepreneurship in mainstream economics, namely, it was not usually considered as a production factor prior to the establishment of the theory of indirect pricing transactions because it was difficult to price directly or transacted.Therefore, pricing of entrepreneurship has not been widely adopted into the theories and practices of the traditional sharing economy.

A Joint Venture can Be Interpreted as An Indirect-pricing-based Resource Transaction by Nature

TOJOY is creating a “joint venture” mode, which defines the boundaries of the liabilities and the sharing method of residual ownership.The joint venture consists of the project provider (start-up company), resource provider (joint venture entrepreneur) and the platform (TOJOY).

The project provider and resource provider are the two parties who make transactions, while TOJOY is the sharing platform enabling them to connect and facilitate the transaction.The joint venture will expand the transaction boundaries between project provider and resource provider.The project provider can get access to market channels, funds, technology, and other resources worldwide through the TOJOY platform; and the resource provider can choose high-quality companies, including unicorns, from all over the world via the TOJOY platform.Through precisely connecting the resource provider and market channels, and designing the indirect-pricing transaction model, TOJOY is able to match project provider and resource provider based on their needs and to facilitate cooperation between the parties.

This mode will save costs for both project provider and resource provider.The former, is able to contact millions of entrepreneurs around the world to obtain precise market channels without additional investment in advertising, marketing, or staffing, thus reducing costs and improving transaction efficiency.For the latter, funds, channels, connections, and other resources can be obtained efficiently.TOJOY’s platform can turn the funds, channels, connections, and other resources on its platform into capital for its users.

This joint venture system also enables “resource multiuse” with the resource provider.In this model,contrary to the resource consumption, resources are not fully exhausted through their use.This means that in cooperating with various project providers on the TOJOY platform, multiple parties will share residual value together to maximize the value of shared resources.A joint venture can be interpreted as an indirectpricing-based resource transaction by nature, a kind of typical new sharing economic system based on the model of indirect pricing transactions.Acting as a platform, TOJOY allows many such enormousindirect pricing transactions to be completed, just as various car sharing or house sharing businesses do on traditional sharing economy platforms.

The new sharing economy pattern has solved many of today’s capital market’s problems.For example,the younger enterprises with are exceptional in creative thinking and technical innovation, but they may lack market presence or capital operations.By contrast, the traditional enterprises leveraging TOJOY’s platform may have abundant capital, talent, and channel resources, but lack sufficient creativity.

With the help of TOJOY’s indirect pricing platform, these enterprises can collaborate by sharing their advantages with each other.Younger enterprises can seize business opportunities as soon as possible by leveraging the advantages of their traditional enterprise cohorts via the TOJOY platform.The reserved resources of traditional enterprises can be reactivated in more strategic directions with the innovative technologies provided by the younger enterprises.As a result, all enterprises can create, share, and win together.

This new sharing economy system is of epoch-making significance, just as global exploration in the colonial period connected previously unconnected economies.

In the book The Age of Great Sharing (Ge & Guo, 2020), the Great Sharing Economy concept was put forward for the first time.In this model, enterprises share existing space, goods, capital, talents,technology, and channels to realize mutual integration and connection.Moreover, the Great Sharing concept is based on the indirect pricing transaction mechanisms, with the “equivalence principle” and“general sharing principle” as its cornerstone.

The equivalence principle means that hypothesis of “economic man” and that of “social man” are consistent in terms of interpreting microeconomic behavior; while the general sharing principle means that, no matter whether for a new sharing economic organization or an economic organization with a traditional business in a “sharing mode,” there is no difference in terms of the promotion and application of “sharing.”

The concept of Great Sharing and the theory of general sharing economics put forward in The Age of Great Sharing mark a milestone in the development of sharing economy theory, beyond the sharing of“physical property” advocated by the traditional sharing economy, to the sharing of intangible resources,such as entrepreneurship, intellectual property rights, and market resources.

In addition, the new sharing economy platform based on the model of indirect pricing transaction is conducive to addressing social problems.For example, sharing finance, healthcare, education, and technical achievements will make resources that used to be difficult to share more accessible.

The new sharing economy based on the indirect pricing mechanism has fundamentally extended the boundaries of the sharing economy.It has given wings to the sharing economy, enabling it to boom again.