Innovation & Technology Innovation & Technology

Can Product Manufacturers Benefit from the Sharing Economy?

Collaborative consumption, also called the sharing economy, is expected to continue growing as a trend, particularly as digital technology makes sharing marketplaces more commonplace and accessible. This shift away from individual ownership of goods could really hurt manufacturers – or, as a recent study suggests, could deliver them profit-making benefits if they adjust their prices and product design.

By Hannah Furlong | Published 8 years ago | About a 3 minute read

The study, “Collaborative consumption: Strategic and economic implications of product sharing,” analyzed and explored the impacts of peer-to-peer product sharing on a range of manufacturers. The researchers – marketing and finance professors from Washington University in St. Louis and Shanghai University in China – concluded that consumers indeed buy less when they have the option of sharing, but also found that firms can benefit if they strategically choose retail prices and increase quality. For products with high marginal costs in particular, doing so can lead to higher profits and lower consumer surplus.

At the same time, the study found that the sharing of products that have low marginal costs can create a ‘losing’ situation for firms who produce those goods, since the strategy is usually to sell a large number of them at a low price, but sharing markets tend to mean that fewer consumers will purchase it. Even if a firm raises its prices on goods with low marginal costs, the price increase is unlikely to completely offset reductions in demand (created by both the sharing market and increased price), resulting in lower profits than if the sharing market did not exist.

With high-cost products, firms can charge even higher prices because more consumers will be willing to pay thanks to their potential earnings from renting out the product. Not only will the firm be better off, but the product might also be used more ‘fully’ if renters are using it when the owner would not otherwise be using it.

This is precisely what billionaire industrialist Elon Musk envisions for Tesla vehicles, particularly once they can drive autonomously. One of his goals is to “enable your car to make money when you aren’t using it,” through a shared fleet of Tesla vehicles that owners will be able to add their cars to. Since many drivers only use their cars for a small portion of the day – to get to and from work, for example – the economic utility of their cars would be much higher if the car is used by someone else when their car would otherwise be parked.

Since Tesla vehicles are electric, wider use of them in place of combustion vehicles would also almost certainly deliver lesser environmental impact. More generally, though, the environmental benefits of the sharing economy are unclear. Quantifying the environmental benefits of the peer-to-peer economy is quite difficult – and the same goes for social benefits. We don’t like underutilized goods and having too much stuff stresses us out; while collaborative consumption helps reduce those problems, it has also (so far) come with rather turbulent ‘gig economy’ jobs. How these trade-offs are weighed has yet to be determined.

Ideally, the shift to product-as-a-service and other breakthrough business models will encourage manufacturers to make more efficient and durable goods. As this study suggests, it might be a highly beneficial way for them to earn more even when consumers buy less.