Peer-to-Peer Sharing Platforms with Quality Differentiation: Manufacturer’s Strategic Decision under Sharing Economy

As peer-to-peer sharing platforms emerge in the downstream market, upstream product manufacturers may build their exclusive sharing platform to engage with the sharing economy. However, it is not immediately clear whether this strategic move would truly benefit the manufacturer. Using a quality-differentiated two-manufacturer framework, we examine the performance of the platform-building strategy for the high-quality manufacturer facing an existing peer-to-peer sharing platform that exhibits ex-ante uncertainty in the quality of the shared products. We show that without its own platform, the manufacturer's sales volume decreases and its profit is hurt by the emergence of sharing economy. We further establish conditions for the economic viability of the platform-building strategy; specifically, if quality differentiation is large and the selling price is not high, then the platform-building strategy may help the manufacturer increase sales and improve profit. The manufacturer effectively reduces its competitor's product quality by building its own platform, because such an exclusive platform can attract the high-quality product owners away from the competitor. As such, the platform-building strategy can achieve quality differentiation in a non-conventional manner -- a novel result among the studies of vertical competition. We also highlight the evolution of the sharing economy ecosystem and its implications on the effectiveness of a platform-building strategy. Furthermore, we study the impact of several key system parameters such as usage level, percentage of sharing owners, and participation costs on profits. Our research shows how quality differentiation may lead to the success of the platform-building strategy, and thus offers important prescriptive managerial insights for firms to properly implement this innovative strategy.