Manufacturers Can Also Win in the Sharing Economy
The sharing economy isn’t all bad news for manufacturers of big-ticket items such as cars. Research suggests that in some circumstances, manufacturers can charge higher prices to customers who are planning to rent out those goods.
The sharing economy has unleashed new ways for individuals and companies to share assets, including large-scale items such as apartments and cars. Sharing services have had large upsides for consumers, who now have more — and less expensive — options for borrowing products. These services have also been a plus for product owners, who get to monetize their investments in new ways.
But what about manufacturers? If consumers can rent or borrow items they use infrequently instead of buying them, it seems like manufacturing would be taking a big hit.
That’s not always the case. Research into the impact of the peer-to-peer market on companies making durable goods, such as cars, boats, and power tools has found results that may seem counterintuitive. Under certain conditions, the sharing economy can create win-win scenarios that benefit not just consumers but manufacturers, too. The research was conducted by three economists — Vibhanshu Abhishek (Carnegie Mellon University), Jose A. Guajardo (University of California, Berkeley), and Zhe Zhang (Carnegie Mellon).
MIT Sloan Management Review spoke with Abhishek, the paper’s lead author, for his insight into what strategies original equipment manufacturers (OEMs) can pursue to capitalize on the value of the sharing economy — and when they should try to preempt it. The interview was conducted by freelance journalist Frieda Klotz, and what follows is an edited and condensed version of their conversation.
MIT Sloan Management Review: How would you characterize the sharing economy at the moment? What direction is it going in?
Abhishek: Right now, consumers own their products and supply them in the sharing-economy marketplace. We may see other models emerging, with communities owning products and renting them to other people in those communities, too. One thing I can say for sure is that the role of the sharing economy will increase.
Technology has really enabled certain markets by reducing the friction with which transactions take place. With a lot of companies that come to mind when we think about the sharing economy — Airbnb for home rentals, Uber for car rides, Turo for car rentals — it’s not as though it wasn’t possible to build these sorts of systems before. We had vacation rental services before Airbnb came about, for example. But the fact that now you have smartphones with location information makes things work very smoothly.
How do durable goods fit into this picture?
Abhishek: Most durable goods are used for short periods of time and have high spare capacity. Cars are used on average 5% of the time, for example. The rest of the time they’re in a garage or a parking lot or on the street. The fact that now you can go to a mobile-enabled marketplace and say, “Hey, I have a car that I can rent out” makes the market more efficient from an economic perspective. It’s a big win for suppliers — the people who own the goods — and for consumers. It’s also a win from an economic standpoint: We’re using resources much more creatively and usefully than we have in the past.
We found that in certain conditions, this is beneficial for manufacturers, too. There needs to be sufficient amounts of heterogeneity. This means that there’s a population in the market that is what we call high-usage — a cohort of people who need to use a product very often — and there’s another group that needs to use the product much less frequently.
In these situations, the OEM forgoes selling to consumers who don’t need to use the item very often. The beauty of the sharing economy is that high-usage people buy the items, such as cars, and when they don’t need to use them, they can supply them to people who use them less often. Low-usage consumers end up renting from these markets instead of forgoing consumption. It’s a win-win-win for the borrower, the owner, and the manufacturer.
It’s surprising that this creates a win for the manufacturer, too. There must be a cannibalizing effect. How do manufacturers make up for losing customers who have been on the fence, wondering, for instance, whether to buy a car?
Abhishek: It’s true that there are people on the borderline about whether to buy or not. If you look at the low-usage consumers, buying a car is a critical decision for them. What ends up happening is that people who are on the fence, deciding whether to buy a car or forgo consumption, now simply enter the rental market.
Manufacturers are going to sell fewer cars, but they can charge a higher price for every car that they sell. People who buy cars will pay more. Earlier they were paying for their own utility only, but now cars are an investment because they can be rented out in the sharing economy and the owner can make some extra dollars.
Ultimately, being able to serve the market with fewer cars is very, very profitable from the manufacturer’s perspective. When you incorporate costs, it becomes an excellent deal for the OEMs.
Can you say more about the idea that car manufacturers are going to be able to charge more for cars because consumers will be able to share them and make money from that sharing?
Abhishek: The sharing economy has an equalizing effect, in which the difference in the value that high-usage versus low-usage people are willing to pay diminishes. The high-usage consumer has only so much downtime for his car. If I need to use it for 80% of the time, I only have 20% of time that I can rent it out on the peer-to-peer market.
But people who need to use cars only for 20% of the time can rent out their cars 80% of the time on the peer-to-peer market, and derive a lot of value from it. This leads to an equalization of how much both types of consumers are willing to pay for the car. Ultimately that’s beneficial for manufacturers because they can raise prices. Without the sharing economy, the OEM either forgoes selling to the low-usage consumers or has to charge a significantly lower price to sell to them, leaving money on the table.
In addition, the sharing economy allows the OEM to discriminate between consumers who differ on another dimension. It sells the cars to consumers who derive a low value from driving irrespective of their usage rate, and allows low valuation customers to rent from the peer-to-peer market.
Your research found that in certain cases manufacturers can’t really compensate for the sharing economy.
Abhishek: That is true. If the market is too homogeneous, with everyone needing to use the good at the same rate, then peer-to-peer market will fail to create value for the OEMs. On the other hand, excessive heterogeneity won’t work either. If there is a segment of people who need to use the good all the time, and another group whose use is close to zero, then the low-usage consumers say, “I don’t even need to use a car that often,” so the rental revenue will be very small. In that case, the OEM can’t charge more for its product because the sharing economy is not going to bring any benefits to the product owners.
As a consequence, the sharing economy is beneficial to the OEMs only under intermediate levels of usage-level heterogeneity in the market.
Your research found that there are times when manufacturers and retailers should rent their products themselves.
Abhishek: Yes. Think about power tools. People buy them because they want to do a project over the weekend and then they sit around in the basement for the next 10 years — they’re used for probably 11 or 12 minutes in their entire lifetime. If there were a sharing economy for power tools, there are enough people who have the devices lying around that it would have a very significant negative impact on consumer purchases.
Companies should not promote the peer-to-peer market in this case. But they should completely do the rentals — which places like Home Depot already do. This is a great way to preempt the market. If you’re a retailer or manufacturer and you think that there is a lot of spare capacity in a space, which someone could mobilize using the peer-to-peer economy, you can preempt its emergence by doing rentals so that consumers don’t even begin to consider borrowing from other consumers.
GM has a sales-plus-rental business model. It sells cars but also has a rental business called Maven. People who don’t need a car very often can rent it from GM’s Maven platform.
What are the implications for OEM companies that are not yet involved in the sharing economy?
Abhishek: Let’s say a business is trying to figure out how to coexist with the sharing economy. What is the best strategy for them? Should it encourage the sharing economy? Should it change prices in the market? Should it add its own rental arm in the market?
We would recommend that companies look at how their consumers segment and at the heterogeneity in usage rate.
If the heterogeneity is in that intermediate region, then they should encourage the sharing economy and think of how they can integrate their business with it. But if the consumer heterogeneity is in these extreme regions, then it should be very careful and try to restrict or preempt it.
Since we started working on this paper two years ago, there have been a lot of changes. Tesla has a car-sharing platform where owners can share their cars and receive income from their vehicles. Mini [BMW Group] has developed a similar scheme.
The bottom line is that OEMs need to recognize the value of the sharing economy. It’s not a case of, “We are going to get screwed and we should make it harder to share things!” It’s actually saying, “This seems like a very good opportunity. How can we leverage the opportunity to grow our business?”
Frieda Klotz is a freelance journalist.
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