There has been a longstanding notion that aggregators ‘cannibalize’ on the smaller players in economies and are disruptive to the growth of the sectors they lie within. This notion seems intuitive if we conceptualize aggregators to be replacing the business of smaller market players; rather than building symbiotic markets, beneficial to these smaller players.
Empirical research suggests that the latter conceptualization is more accurate. Such research shatters the long-standing notion that aggregators destroy the market segments they have entered and instead suggest that aggregators pioneer growth in these segments as well as the overall national economies. Judd Cramer and Alan B. Krueger provide some compelling evidence for the benefits of a particular aggregator – Uber X on the cab-hailing segment of the US economy. This case study, though specific to the cab-hailing segment of the US market, helps us better examine the beneficial effects of aggregators in general. The findings of this study could be extrapolated to most if not all segments of the market and explain the efficacy of apparel aggregators, real estate aggregators, and so on.
We can lineate three key ways in which aggregators boost the segments they exist within – by increasing overall supply, by raising demand for goods/services of the segment and by significantly increasing the efficiency of the segment. I will now examine each of these three ways empirically.
The first way that aggregators grow their segments is through an increase in the efficiency of these segments. We first must operationalize efficiency, and in this case, we can do so by comparing the Capacity Utilization rate of Uber X Drivers with those of traditional, stand-alone cab merchants. Capacity Utilization Rate can, in turn, be measured through two metrics – the amount of time the driver has a paying passenger in their cab out of the total time they are working; and the total distance the driver covers in a workday when they have a passenger in their cab. In the study being referred to, Capacity Utilization rate comparisons are performed across five cities – Boston, Los Angeles, New York, San Francisco, and Seattle. Results suggest that UberX drivers have customers in their cabs about 50% of the total time they are driving. On the other hand, individual cab drivers have customers riding in their cabs between 30-50% of the time they are driving on average. This amounts to a staggering 20% increase in efficiency if we go by the first metric of Capacity Utilisation Rate. Turning to the second metric – the total distance covered in a workday with customers, we find that when Capacity Utilisation Rate is 50% higher for UberX drivers than for independent cab drivers (Cramer & Krueger, 2016).
At this junction, we have established that UberX has a higher efficiency than individual cab drivers, as evidenced by a higher Capacity Utilisation Rate. This means that cab drivers would significantly benefit from opting to provide their services through an aggregator rather than as independent merchants. From this case, we can extrapolate to other segments of the market that would also reap the benefits of increased efficiency due to aggregators.
The second way aggregators affect their segments is through an increase in the supply. Traditional cab-hailing often requires visiting particular vehicle hotspots such as taxi stands, in many cities of the world. UberX enables rides to be commenced from the very spot you are located at. Here, a new way of reaching out to customers has been enabled. Aggregators like Uber X thus eliminate the amount of effort the customer must expend vis a vis commute before commencing one’s journey. Thus they could be preferred alternatives to traditional cab services. Here, the advent and usage of technology play a critical role in raising the supply of aggregator services. To extrapolate this example to the hospitality sector, we turn to Africa wherein there was a low supply of affordable accommodation for travellers. The existent hotels and inns prior to the advent of Airbnb were relatively expensive and unattainable for most travellers. When Airbnb entered this market, it promoted local owners of homes and apartments to rent out their residences to travellers who would have in other circumstances not stayed overnight in Africa. This could further have boosted the travel industry in Africa as well (Dupoux, Ivers, Danouni, Sqalli & Nmabeket, 2020). Thus, aggregators not only increase supply in their particular segment but also boost tourism to the national economies they operate within.
Now, let us turn to the third way that aggregators shape the segments they are within – by increasing demand. It has been previously expressed by many economists that aggregators merely ‘cannibalize’ the existent retail sales and do not significantly add to demand. However, there are new studies that aggregators and online marketplaces enable us to have progressive sales growth. These studies draw from both developed and developing economies, which is an important factor to take into account. In fact, a European BCG survey concluded that only approximately 19% of total ride-hailing journeys involved cannibalization from more traditional taxi drivers. In other words, a very small percentage of the total rides hailed involved piggybacking while the majority genuinely added to the demand of the country.
Finally, we turn to the biggest fear regarding aggregators in the digital market – that they take away livelihoods from local merchants and result in net unemployment. To start with it is important to take into account the fact that aggregators require logistics providers on a large scale. These logistics providers are involved in the recruitment as well as training of new customers and merchants who enter the digital marketplace. This is particularly the case with developing countries that have lower digital literacy. Logistics providers increase familiarity with the platform and play a crucial role in its functionality and the growth of aggregators means an increase in employment for individuals with the skill set to take on the role of a logistics provider. Further, aggregators that run online require technical support services which creates new opportunities for employment as well in the nation.
Across the globe, a positive correlation has been found between labour market efficiency and e-commerce growth. This means that as the advent and usage of e-commerce increases in a country, the labour market becomes more efficient. Take the case of Africa. Research has shown that aggregators will generate employment for 3 million new individuals in the six years between 2019 and 2025; which amounts to one new job for every 150 individuals unemployed. This includes jobs in the direct, indirect, and induced employment verticals; and subsumes 20-25% annual revenue growth by 2025. Employment in Africa will rise to 100,000 in the direct employment vertical, 1 million in the indirect employment vertical, and 1.8 million in the induced employment vertical.
Other than a net increase in employment, aggregators may bring with themselves more diversity in the market. The advent of regulations and policies could mean that a lot more women enter the segments traditionally dominated by men, given the security these regulations provide.
One caveat to take cognizance of here is that there may be externalities created by the entry of aggregators into the market. For instance: the rise of Airbnbs could mean that noise pollution levels in the neighbourhood also undergo a rise. If not taken into account and mitigated properly, such externalities will have drastic consequences. Take the instance of GoJek – a motorbike aggregator in Indonesia. GoJek has made considerable efforts to not eliminate local market players, but instead integrate them into their mobile application. This includes integrating public transport services into their app. Consequently, 90% of the taxi drivers believe GoJek lead to an improvement in their quality of life while 90% of the consumers believe it has positively impacted the community. Had GoJek not made efforts to integrate these services, perhaps it would not have achieved the success it currently has in Indonesia (Dewa et al, 2020).
GoJek is the perfect example of how a national aggregator can drive national economic growth, generate mass employment, improve the lives of their drive partners, boost the success of SMEs and increase the quality of life for consumers. IDR 8.2 trillion of the Indonesian Economy can be annually attributed to GoJek, just through the income of Merchant partners and 1,7 trillion IDR through the income of SME partners. This amounts to 52,70,76,967.80 USD and approximately 64277679.00 USD respectively. 89% of the consumers reported that GoJek has positively impacted their lives and 78% reported that a shut-down of GoJek would adversely affect society. The lifestyle of merchant partners has undergone an approximately 44% increase in quality after beginning to work under GoJek, with a 31% increase in their expenditure. 90% of Gojek drivers claimed their life had undergone a positive change since they began riding under the banner of Gojek. 99% of the consumers reported satisfaction with GoJek’s services. All these statistics point to the symbiotic nature of GoJek as an aggregator that has boosted the economy and grown a community around its brand (Dewa et al, 2020).
Albeit aggregators can potentially create negative externalities, their impact on the sector they exist within is remarkable and benefits consumers, merchants as well as the national economy as a whole.