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

Abstract

Business models that focus on providing access to assets rather than on transferring ownership of goods have become an important industry trend, representing a challenge for incumbent firms. This paper analyzes the interaction of a peer-to-peer (P2P) rental market and an original equipment manufacturer (OEM). The analysis highlights the important role of consumer heterogeneity in usage rates in determining which business model would be preferred by the OEM. The introduction of a P2P rental market creates an equalizing effect, which leads to purchases from low-usage consumers. P2P rentals act as a discrimination device, allowing the OEM to implicitly segment consumers and extract a larger fraction of surplus, which might hurt consumers. Furthermore, the OEM is better off with P2P rentals when the heterogeneity in usage rates is intermediate, while the consumers are better off with P2P rentals when the heterogeneity is sufficiently high. This paper examines different business models such as the sales-only OEM, the OEM offerings rentals in addition to sales (the “dual” firm), introducing a P2P platform to the market (the “P2P-sponsoring” firm), and a mixed structure in which the OEM competes against a P2P by introducing its own direct rentals (the “dual-plus-P2P” firm). Consumer heterogeneity in usage rates continues to play a fundamental role in market outcomes. When usage rates and heterogeneity in usage rates are sufficiently large, the OEM is better off offering sales and facilitating a P2P rental market. In contrast, if heterogeneity in usage rates is too low, the OEM prefers to operate as a sales-only monopoly. If heterogeneity is too high and usage rates are below a threshold, the OEM prefers to operate as a dual firm that offers both sales and rentals directly to consumers. If P2P rentals are unavoidable, the OEM would not necessarily be better off by introducing its own rentals to compete against P2P. Overall, contrary to what could be expected, the OEM has an incentive to facilitate P2P rentals in a large variety of cases.

Keywords: Business Models, Sharing Economy, Peer-To-Peer Marketplaces, Rentals, Manufacturing