How do product quality uncertainties affect the sharing economy platforms with risk considerations? A mean-variance analysis

Xin Wen, Tana Siqin

Research output: Journal article publicationJournal articleAcademic researchpeer-review

18 Citations (Scopus)

Abstract

The sharing economy is of increasing importance for various aspects of our society by providing people with cost-efficient and convenient access to services or products. However, the profitability and healthy development of the sharing economy platforms are greatly restricted by the intensive uncertainties arising from product quality. How to determine the optimal product quality improvement efforts and the optimal prices for the sharing platforms becomes crucial. Moreover, it is reasonable that many sharing economy platforms and consumers are holding a risk-averse attitude during decision making in the highly volatile market. In this paper, we employ the Mean-Variance theory to model the risk-averse attitudes of decision makers, and analytically derive the optimal average quality levels and prices that the platform should provide for the market. We also explore how the critical factors like product quality uncertainty and risk sensitivity affect the platform's equilibrium decisions and consumer surplus. Our analytical results reveal the importance of reducing the difficulty of improving product quality for enhancing the platforms' profitability and consumer surplus. Besides, we identify that it is not always wise for platforms to invest in improving product quality, especially when the related cost becomes increasingly expensive. Moreover, it is shown that the increasing risk aversion or product quality volatility will induce the platform to reduce his quality improvement efforts. Finally, we interestingly find that the platform will always suffer if he becomes risk averse from risk neutral, while consumers may benefit from this attitude change.

Original languageEnglish
Article number107544
JournalInternational Journal of Production Economics
Volume224
DOIs
Publication statusPublished - Jun 2020

Keywords

  • Consumer utility
  • Mean-variance theory
  • Pricing strategy
  • Sharing economy
  • Uncertain product quality

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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