The Sharing Economy: Getting Started

Zhixuan Fang (房智轩)

November 14, 2018

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Introduction

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The sharing economy has arrived:

3

Introduction

Sharing industry is big:

4

However, we still don’t fully understand the following aspects…

Introduction

Introduction

➢ What is sharing economy and what’s new versus renting?

5

Introduction

➢ What is the optimal pricing strategy?

6

Introduction

➢ More importantly, most platforms are revenue-driven.

7

How do they impact social welfare?

The Big Picture

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PlatformSuppliers Consumers

Consumers rent idle resources from suppliers through the platform

PayPay

When & What?

Company Area Country Founded

Uber Ride sharing United States 2009

Didi Chuxing Ride sharing China 2012

Lyft Ride sharing United States 2012

Mobike Bike sharing China 2015

Airbnb Accommodation United States 2008

Grab Transportation Singapore 2011

Ola Transportation India 2010

Taskrabbit P2P service United States 2008

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The sharing economy rises around 2010

Why We Participate?

• Have idle resources

• Make some money

• Meet different people

• Happy to help

• ……

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PlatformSuppliers Consumers

PayPay

• In need of service/resource

• Even better if it saves money

• Feels more user friendly

• Save the planet

• ……

➢ Economic incentive ➢ Social interaction ➢ Environmental concern➢ Others ……

What’s New?

• Real time fluctuated demand and supply– Real time finely tuned pricing strategy, e.g., surge pricing

• Heterogeneous selfish individual suppliers and consumers– Personalized incentive and pricing

• Matching demand and supply– With huge amount of spatio-temporal data

• Platform sets prices (not always the case)– Selfish intermediary

• User can switch identity between suppler and consumer– Use it, or own it?

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Key Questions

➢Revenue vs. Welfare• How to improve them?

• Can we improve them simultaneously?

• If so, under what circumstances?

➢ Supply vs. Demand• How are they responding to price/subsidy?

• How do they affect revenue and welfare?

• How to better match them?

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NO ownersNO≥2

NR renters

Action: sets per unit price p

Platform

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Model

Action: renting

Utility:

Usage Benefit

NR renters

Platform

NO ownersNO≥2

Level of usage

Model

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Action: renting

Utility:

Strategy:

NR renters

Platform

NO ownersNO≥2

Model

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Action: self-use and sharing

NR renters

Platform

NO ownersNO≥2

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Model

Action: self-use and sharing

Utility:

NR renters

Platform

Benefit from self-usage

NO ownersNO≥2

( )

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Model

Action: self-use and sharing

Utility:

NR renters

Platform

Matching probability.

NO ownersNO≥2

( )

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The coupling of owner’s supply makes it a game.

Model

Action: self-use and sharing

Utility:

NR renters

Platform

c = cost per unit, e.g., gas.

NO ownersNO≥2

( )

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Model

Action: self-use and sharing

Utility:

Strategy:

NR renters

Platform

NO ownersNO≥2

( )

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Model

Action: self-use and sharingUtility:

NR renters

Platform

NO ownersNO≥2

Action: rentingUtility:

Action: sets per unit price pRevenue:

Model

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0 10 20 30

50

100

150

200

0

Price

Dem

and

DemandSupply

How to Price Optimally

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Theorem 1.1: Unique Nash equilibrium exists.

Moreover, the equilibrium behavior falls into four regimes

(i) Exists pc, such that S(pc) = D(pc)

(ii) For 0 < p < pc, S(p) < D(p) and S(p) is non-decreasing

(iii) For pc < p ≤ pupper, S(p) ≥ D(p)

(iv) For p > pupper, S(p) = 0

pc

0 10 20 30

50

100

150

200

0

Price

Dem

and

DemandSupply

How to Price Optimally

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Theorem 1.2: Regarding psw and pr :

(i) pc maximizes welfare (psw = pc);

(ii) pr leads to over supply (pr ≥ pc );pc

Theorem 1.1: Unique Nash equilibrium exists.

Moreover, the equilibrium behavior falls into four regimes

(i) Exists pc, such that S(pc) = D(pc)

(ii) For 0 < p < pc, S(p) < D(p) and S(p) is non-decreasing

(iii) For pc < p ≤ pupper, S(p) ≥ D(p)

(iv) For p > pupper, S(p) = 0

0 10 20 30

50

100

150

200

0

Price

Dem

and

DemandSupply

How is Supply Responding to Price?

• It increases first.

• It could decrease after pc .

• It is aligned with platform’s revenue.

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pc

Recall: Platform’s revenue is:

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When is revenue maximized?

5 10 15 20 250

50

100

Revenue R(p)DemandSupply

Price

Dem

and

0

600

800

400

200

Rev

enu

e

Recall: Platform’s revenue is:

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When is revenue maximized?

5 10 15 20 250

50

100

Revenue R(p)DemandSupply

Price

Dem

and

0

600

800

400

200

Rev

enu

e

Define - V(p) = pD(p): the maximum possible revenue for platform- ppotential = argmax V(p): the best potential price

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When is revenue maximized?

5 10 15 20 250

50

100

Revenue V(p)DemandSupply

Price

Dem

and

0

600

800

400

200

Rev

enu

e

ppotential

When is revenue maximized?

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Theorem 1.5: If ppotential ≥ pc , the platform achieves maximum revenue by pr = ppotential . Otherwise psw = pr = pc .

Remark: Supply shortage is a barrier for achieving max revenue

Hence subsidy!

5 10 15 20 250

50

100

Revenue V(p)DemandSupply

Price

Dem

and

0

600

800

400

200

Rev

enu

e

ppotential

Subsidies

➢Why need subsidies?• Help increase supply and revenue

• Lock in loyalty suppliers in platform competition

➢How are subsidies paid?• Proportional to supplier’s sharing level

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Introducing Loyalty Program

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Suppliers Consumers

Pay qBase pay p

Bonus B(s)

“Loyalty Program”

Platform’s revenue:

q=(1+β)p

Supplier’s utility:

Introducing Loyalty Program

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Suppliers Consumers

Pay qBase pay p

Bonus B(s)

“Loyalty Program”q=(1+β)p

Homogeneous market:

Heterogeneous market:(highly differentiated users)

Supplier’s Trade-off

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Supplier’s utility:

Marginal benefit of self usage Sharing in loyalty programSharing in fixed price

sharingself use

Supplier will choose intersection points to balance marginal incomes

Homogeneous Market

Definition 2.1: A linear loyalty program (LLP) pays a constant bonus B for per unit sharing, to those who reach threshold t.

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Marginal price under LLP Sharing under LLP

s0

s

p+Bp

Homogeneous Market

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Theorem 2.2: LLP achieves the maximum revenue over all subsidy programs in a monopoly market, and the optimal bonus satisfies:

Marginal price under LLP

= q Independent of f(x)!

Homogeneous Market

Corollary 2.3: The maximum platform revenue is achieved by letting

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f’(x)

B(s)s=1-x

t

B

x

Mar

gin

al u

tilit

y

Platform pays nothing before threshold!

Based on real data from Didi- It contains 395,938 actual transaction records on Jan 8 2016.

Reverse-engineer user benefit function- We derive usage behavior from price-frequency curve.

(α=19190, β=0.0832)

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Benefit function:

Case Study - Setup

Welfare and revenue optimal prices

Social welfare and platform revenue are aligned in real case!

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Didi’s ratio

ppotential = 12

psw

pr

Case Study – Welfare & Revenue

The effect of cost

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Owners will suffer all the lost!

pc

A properly chosen c can reduce redundant supply

Case Study – Role of Cost

Take Away

✓ Sharing economy is a rising topic that requires researchers from different area

✓ Revenue maximization is also good for welfare, especially under insufficient supply

✓ Subsidies increase supply and platform’s revenue

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