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

Xin WEN*, Tana SIQIN

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

48 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
Number of pages10
JournalInternational Journal of Production Economics
Volume224
Early online date2 Nov 2019
DOIs
Publication statusPublished - Jun 2020
Externally publishedYes

Bibliographical note

Tana Siqin’s research was fully supported by a grant from the Research Committee of The Hong Kong Polytechnic University under account code RK2T.

Keywords

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

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