Business Models in the Sharing Economy: Manufacturing Durable Goods in the Presence of Peer-to-Peer Rental Markets

Abstract

With peer-to-peer sharing of durable goods like cars, boats, and condominiums, it is unclear how manufacturers should react. They could seek to encourage these markets or compete against them by offering their own rentals. This work shows why the best business model depends on whether consumer usage rates vary or not. Contrary to what might be expected, this paper shows that manufacturers have an incentive to facilitate transactions of P2P rental markets in a large variety of cases. We find that when consumer variation in usage rates is intermediate, the manufacturer is surprisingly best off avoiding offering its own direct rentals option and instead, facilitating a peer-to-peer rental market where consumers can share among themselves. The reason for this is an effect unique to the sharing economy, the equalizing effect. The equalizing effect shows that peer-to-peer rentals uniquely make previously heterogeneous willingness-to-pay among consumers more similar, making it easier for the firm to discriminate between the higher- and lower-value consumers, thus allowing it to extract a higher portion of consumers’ surplus. Surprisingly, there are some cases where peer-to-peer rentals benefit the manufacturer, but consumers are hurt overall (though the lower-usage consumers do always benefit from the availability of peer-to-peer rentals).