On-Demand, Long-Term, or Hybrid? An Economic Analysis of Optimal Rental Models on Sharing Platforms

Abstract

The rapidly growing sharing economy is characterized by improved resource utilization through peer-to-peer transactions. Sharing platforms usually adopt three rental models: long-term, on-demand, and hybrid, where the long-term rental requires full dedication of resources to market over a predefined period, the on-demand rental allows resources to be exchanged for a fraction of the period, and the hybrid rental model provides both rental options. We develop an analytical model consisting of a monopolistic sharing platform that connects renters with owners who have heterogeneous asset utilization and incur different inconvenience costs of participation under different rental models. We examine the platform's optimal rental strategies and their impacts on social welfare and consumer surplus. We find that, when the renters' and owners' total inconvenience cost is significantly high (moderate) compared to the product valuation, only the long-term model (only the long-term and on-demand models) can sustain in equilibrium; otherwise, all three rental models are sustainable. In the latter case, the optimal rental model depends on the relative inconvenience costs between owners and renters. When the owners' inconvenience cost is significantly higher (lower) than the renters', the on-demand (long-term) rental model is the best for the platform. If and only if these two costs are comparable, the platform optimally chooses the hybrid rental model. When selected, the hybrid model also maximizes social welfare, and, fortunately, in a wide range of parameter regions it also yields the highest consumer surplus. In the presence of a moderate total inconvenience cost, the platform optimally chooses the long-term rental model unless the renters' inconvenience cost is very low and the owners' inconvenience cost is not too high. When selected, the long-term model also maximizes both social welfare and consumer surplus. Overall, our results offer important new insights into the platform's optimal rental-model choice in the sharing economy and its implications for consumers and society.

Keywords: sharing economy, analytical modeling, rental model, peer-to-peer transactions