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

Business models that provide access to assets rather than transfer 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 a manufacturer of durable goods, and highlights the important role of consumer heterogeneity in usage rates in determining which business model would be preferred by the manufacturer. 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 manufacturer to segment consumers and extract a larger fraction of surplus, which might hurt consumers. The manufacturer is better off with P2P rentals when the heterogeneity in usage rates is intermediate, whereas the consumers are better off with P2P rentals when the heterogeneity is sufficiently high. This paper examines different business models such as the manufacturer with only sales, with rentals in addition to sales (the "dual" firm), with its own P2P rentals platform alongside sales (the "P2P-sponsoring" firm), and with a mixed structure in which the manufacturer competes against P2P rentals by introducing its own direct rentals (the "dual-plus-P2P" firm). Consumer heterogeneity in usage rates plays a fundamental role in business model outcomes. When usage rates and heterogeneity in usage rates are sufficiently large, the manufacturer is better off offering sales and facilitating a P2P rental market. In contrast, if heterogeneity in usage rates is too low, the manufacturer prefers to offer only sales. If heterogeneity is too high but usage rates are below a threshold, the manufacturer prefers to operate as a dual firm that offers both sales and rentals directly to consumers. If P2P rentals are unavoidable, introducing its own rentals to compete against P2P rentals might not be the best strategy for the manufacturer under certain conditions. Overall, contrary to what could be expected, the manufacturer has an incentive to facilitate P2P rentals in a large variety of cases.