Freedom to choose contracting party under incomplete contract : the case of Airbnb

Abstract

This thesis examines the factors that determine a simple adhesion contract offeror’s decision to forgo the rights to choose contracting parties. An adhesion contact is a non-negotiable, standardized contract drafted by the contract offeror (can be a buyer or seller). It can be offered privately to a selected group with implicit selection criteria (private offering) or publicly to an eligible group with or without explicit selection criteria (public offering). In the latter case, the offer is irrevocable meaning that the contract offeror immediately enters into a contract with an eligible party that has accepted the offer. Under this arrangement, the offeror loses the right to choose the contracting partner and an opportunity to negotiate for a better deal, which appears to be not to his/her advantage, especially when information is asymmetric. However, this arrangement is not uncommon. An obvious example is the trading of financial assets listed on a stock exchange where all traders offer to sell or buy at a price that is irrevocable. All trading contracts are standardized and there is no selection of trading parties. Another example is a supermarket or grocery store chain, where customers can buy items on the shelves at the displayed prices (public offer to sale at the displayed price). This is in sharp contrast to a housing rental contract, in which the offeror (property owner) usually screens prospective tenants with implicit criteria. The central research question of this thesis is: Why do some contract offerors voluntarily forgo the right to choose and negotiate with contracting parties (public offering), while others do not (private offering)? In the Airbnb market, both public and private offers co-exist. This presents excellent opportunities for testing the factors that determine the choice between private and public offerings. The host of an Airbnb property can choose to have the booking method of his/her listed property to be instantly booked or undergo filtered booking, which correspond to a public and private offering, respectively. The analytical framework developed by this thesis was inspired by Williamson’s (1981) differentiation of those transaction costs that arise before (ex ante) the parties enter into a contract from those that arise thereafter (ex post). Here I argue that the choice between public and private offerings can lead to substitution between these two types of transaction cost. I found that:

(1) Filtered booking is more likely for hosts with longer histories in the Airbnb business. (2) Airbnb rooms with more uncertain ex post transaction costs are less likely to be instantly bookable. (3) Filtered booking is more likely if no security deposit is required from the guest. (4) The vacancy rate of filtered booking rooms is higher compared to that for instant booking rooms.

The findings support the general proposition that the choice between public and private offerings depends on the tradeoff between the ex ante and ex post transaction costs. This proposition has wider implications besides explaining the choice of booking types in Airbnb. Following the same logic, one can explain why a public offering tends to be the arrangement for hotel room bookings, large grocery chains, and listed financial assets, primary housing market while a private offer is more common for housing rental contacts, labor contracts, private clubs, individual small grocery stores and secondary housing market.