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). Our analysis highlights the important role of consumer heterogeneity in usage rates as a driving factor of the mechanisms that explain the different market outcomes. Indeed, both the OEM and consumers can benefit from P2P rental markets for intermediate ranges of consumer heterogeneity in usage rates, but both can be worse-off when the heterogeneity is too low or too high. Further, P2P rental markets have an equalizing effect on the heterogeneous consumer population, as low-usage consumers earn relatively more from P2P rentals than the high-usage consumers. We investigate alternative market structures for the OEM, and show that under intermediate levels of consumer heterogeneity in usage rates, it is best for the OEM to operate in the presence of a P2P rental platform. If heterogeneity in usage rates is too low, the OEM prefers to operate as a monopoly, offering sales only, whereas if heterogeneity is too high, the OEM prefers to offer sales and rentals directly to consumers. In addition, if the incumbent firm manages the P2P platform, it would choose to charge a transaction fee equal to zero for P2P rentals. Thus, contrary to what could be expected, the OEM has an incentive to facilitate P2P rentals in a large variety of cases.