A few years ago, my brother told me about AirBnB — an enterprise that helps match people looking to rent a couch, a room, or a whole house with those willing to provide that space. I was immediately intrigued. This would allow me to live more like a local wherever I travelled, and it was a fraction of the price of staying at a hotel! But was it safe?
How could I know my hosts wouldn’t lie about the quality of their house? And how could they know I wouldn’t trash their home?
In economics, we refer to these as “asymmetric information problems,” because one person in the exchange has more information than the other. And understanding how AirBnB solves these problems — or doesn’t — can help you use the service with more confidence that you’ll get what you bargained for.
AirBnB uses a system where guests and hosts rate each other with 1-5 stars. This alleviates some of the uncertainty of staying with someone you don’t know or letting a stranger into your home. In many ways, it’s a great incentive structure too. I need to be on my best behavior, as either a guest or a host, in order to do well in this marketplace during future exchanges.
What can go wrong with AirBnB
However, it turns out that choosing a great place to stay is more complicated than simply looking at its star rating.
I’m an AirBnB pro now. From Tiki huts, to farms, to a house built over a waterfall, I’ve stayed in AirBnBs around the world. While most of my stays have been truly delightful, there have been a couple that disappointed. Last summer, I had booked a luxurious cabin in a pristine valley looking out onto the Canadian Rockies. I thought it was going to be the grand finale to a long road trip.
I found piles of laundry in the bedroom, cans and bottles in the yard, and construction materials everywhere.”]On arrival, I found piles of laundry in the bedroom, cans and bottles in the yard, and construction materials everywhere — not at all what the pictures had depicted. After some back and forth with the host, I managed to cancel my reservation, but then I had to search at the last minute for a hotel.
How did this happen? The pictures online looked great and the reviews were stellar. Hmm … come to think of it, most of the reviews on AirBnB are stellar. I went back and examined them more carefully. I noticed that while this particular cabin was often booked, the reviews were sparse. Sometimes months passed between reviews.
That reminded me that I don’t always leave a review. I thought of one stay that wasn’t terrible, but it wasn’t that great either. I couldn’t, in good conscience, recommend that others stay there. Rather than leave a public review, I chose not to leave a review at all.
How AirBnB pushes visitors into positive reviews
I began to look more into the AirBnB review process, and I found a number of articles that mentioned the very high reviews of most of their rentals. Why was this the case? Was everyone just too nice to leave a negative review? A little more digging led to interviews with AirBnB hosts who revealed an interesting insight into their guest-selection process.
Most hosts prefer to review requests for booking before they accept them. They can see your profile, where you’ve stayed, reviews other hosts have written about you as a guest, and reviews you’ve left of other hosts. This helps them avoid problems resulting from asymmetric information. What piece of information do they pay the most attention to? I’ll give you a clue; it’s not the reviews others have left about you.
Hosts care more about the reviews you’ve left of other hosts. Why? If 95% of other hosts have a rating of 4.5 or higher, one or two negative reviews could leave you behind the competition.
By providing more information for hosts — they can see both the reviews about the guest and the reviews the guest has written — AirBnB’s rating system actually provides less information for guests! Guests respond to their incentives by only leaving positive reviews. Hosts respond to their incentives by only renting to guests who leave positive reviews. So average ratings remain very high and can potentially be misleading.
Amazon vs AirBnb
Now what makes this market different from one like Amazon? There are millions of independent sellers on Amazon who also have star ratings corresponding with customer satisfaction, yet they don’t seem to discriminate between buyers who leave negative reviews and ones who leave positive reviews. Neither do customers hesitate to leave a negative review if they are unsatisfied with the transaction, since there is little or no consequence of doing so. This gives us a clue into who has more market power here.
Multiple vendors sell many, nearly identical products on Amazon. This means there’s intense competition with one another for customers. If it’s the consumer that has the power, they can expect a seller to work to “make it right” if they voice their displeasure over a botched transaction. Indeed, there are many examples of this if you read seller reviews.
With AirBnB, buyers (guests) don’t have as much market power, for at least 3 reasons:
- First of all, the product offerings are unique. The more unique and desirable your property is, the more market power you will have.
- Second, this is a supplemental form of income for many of the sellers. Thus, they can afford to be more selective regarding the type of customer they choose to do business with (this is a form of elasticity of supply).
- Finally, this service can only be provided to one buyer at a time, so buyers face more competition from each other.
Does this mean guests are left in the dark about the quality of the service they’re purchasing and have to take what they can get? Not at all.
On one hand, it takes a little more work to figure out which properties are the gems and which are the duds. From past experience, I have learned that I need to look for other signals of quality beyond the star rating. I dig deeper. I look for number of reviews, time between reviews, and actually read the reviews to glean other clues. It takes more time; the market is less efficient.
On the other hand, many hosts really do work hard to ensure your stay meets your expectations rather than risk a negative review. Because the average ratings are so high, a small number of negative reviews can be a pretty big deal.
So, somewhat ironically, the information that gives hosts some market power also constrains their behavior. So while you do have to do your research to avoid the occasional lemon, Airbnb generally ends up being a market for peaches —the best buyers and sellers tend to have the most success in future transactions.
So, the next time you use a service like AirBnB, don’t just accept the host’s average rating at face value. Remember the information asymmetry problems, AirBnB’s solution to them, and the behaviors that leads to: unhappy guests tend to leave no reviews rather than bad reviews.
That insight will let you rebalance the asymmetry in your favor.