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The Car Sharing Economy: Interaction of Business Model Choice and Product Line Design

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Document pages: 44 pages

Abstract: Several auto manufacturers have recently introduced car sharing programs. Although the structure of most programs is the same, there is no clear dominant strategy regarding the type of vehicles OEMs should provide through car sharing. In this paper, we consider an OEM who contemplates car sharing and designs its product line by accounting for the trade-off between driving performance and fuel efficiency under CAFE standards. Customers have different valuations of driving performance and decide whether to buy, join car sharing, or rely on their outside option. We find that the OEM increases the fuel efficiency of the vehicles it provides through car sharing. This higher efficiency enables the OEM to charge a higher selling price to the higher end of the market, increasing its profit from selling. This is especially beneficial to higher-end OEMs who face greater cannibalization and can explain why Daimler and BMW have been particularly active in introducing car sharing. Offering car sharing is not always environmentally beneficial. Even when it is, we find that doing so may reduce the OEM s CAFE level. In such cases, incentive multipliers should be granted for each shared car. Finally, if anticipating aggressive CAFE standards, OEMs may introduce car sharing to better absorb the increase in the production cost.

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