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Product selling vs. pay-per-use service: a strategic analysis of competing business models
We present a model that suggests possible explanations for the observed proliferation of âpay-per-use" (PPU) business models over the last two decades. Delivering âfractions" of a product as a service offers a cost advantage to customers with lower usage but requires extra delivery costs. Previous research focused on information goods (with negligible production costs) and predicted that PPU, when arising as a differentiation to selling in equilibrium, fundamentally achieves lower profits than selling. We extend the theory by covering goods with any production cost, in duopolistic competition. We show that PPU business models can be more profitable than selling (especially at mid-range production costs), as long as their delivery costs are not too high, a requirement that is more easily fulfilled as new technologies reduce these costs. Moreover, if firms are imperfectly informed about their customers' usage profiles, PPU's effective pricing of customers' varying usage offers an additional advantage over selling. This requires companies to employ accounting methods that do not inappropriately allocate production costs over stochastic usage levels. If PPU service provision suffers from queueing inefficiencies, this does not fundamentally change the relative profitability of the PPU and selling models, provided that PPU providers can attract sufficiently high demand to benefit from pooling economies
On the role of patience in an insurance market with asymmetric information
We analyse a 2-period competitive insurance market which is characterized by the simultaneous presence of standard moral hazard and adverse selection with regard to consumer time preferences. It is shown that there exists an equilibrium in which patient consumers use high effort and buy a profit-making insurance contract with high coverage, whereas impatient consumers use low effort and buy a contract with low coverage or even remain uninsured. This finding may help to explain why positive profits and the opposite of adverse selection with regard to risk types can sometimes be observed empirically. JEL Classification: D82, G2
PLATFORM DELIVERY: A GAME-THEORETIC ANALYSIS OF A NEW DELIVERY MODEL IN THE SHARING ECONOMY
Owing to the advances in technology, new types of service delivery spring up in the sharing economy. Owning no warehouse and hiring no full-time shippers, Instacart runs its grocery delivery service by delivering grocery from independent retailers by independent contractors to its consumers. This âplatform deliveryâ model is formulated as a game-theoretic model and investigated. We discuss the profitability of three common pricing strategies, membership-based pricing, transaction-based pricing, and cross subsidization. It is shown that these three strategies generate the same amount of profit for the perfectly patient platform. However, in general the membership-based strategy would be better than the others
The Switching Cost Puzzle
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Institutional transplant and American corporate governance: the case of Ferodyn
This paper examines the relationship between employment relations and American corporate governance using the case of Ferodyn*. In response to difficult industry conditions and sagging performance, American-owned Landis* Steel Corporation and Japanese-owned Daiichi* Steel Corporation jointly financed and built Ferodyn, a state-of-the-art high quality steel finishing facility. Although the joint venture was extremely successful in terms of quality, productivity and industrial relations, it came under severe stress from both external and internal pressures. Ferodynâs success was moderated by the market in that it was never able to extract a price premium for the quality of steel it produced. At the same time, pressures in the form of corporate governance and the parent / subsidiary relationship were substantial. Institutional investor demands for improvements in short run shareholder value ultimately resulted in the sale of Landis to Maxi-metal*, a global steel conglomerate, committed to a strategy of minimising costs. In this case, the organ transplant provides a useful metaphor: Ferodyn was like a strong and healthy âorgan transplantâ in a weak and ailing corporate âbody.â So long as there were buffers in place to protect it from rejection by its host, Ferodyn could prosper, giving rise to exceptionally high labour standards and quality of life for its employees. In effect, the American system of corporate governance and the nature of power relations in the corporation created antigens that weakened both Landisâs ability to support the joint venture and Ferodynâs ability to survive in an alien and hostile corporate, industry and macro-economic environment.
* Ferodyn, Landis, Daiichi and Maxi-metal are fictitious names
Sharing delay information in service systems: a literature survey
Service providers routinely share information about upcoming waiting times with their customers, through delay announcements. The need to effectively manage the provision of these announcements has led to a substantial growth in the body of literature which is devoted to that topic. In this survey paper, we systematically review the relevant literature, summarize some of its key ideas and findings, describe the main challenges that the different approaches to the problem entail, and formulate research directions that would be interesting to consider in future work
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