How to Market Smart Products: Design and Pricing for Sharing Markets

Abstract

This paper introduces joint product design and non-linear pricing in the context of sharing markets. Product ecosystems enable user sensing, setting the stage for the control of post-purchase consumption patterns. By varying the degree to which products can be reused and transferred among peers, a company can engineer their shareability, which together with a capacity of aftermarket control, allows for flexible non-linear pricing that involves charging for the initial purchase and for subsequent collaborative transfers separately. Using a dynamic model with heterogeneous consumers and asymmetric information, we analyze a firm’s economic strategy, including ecosystem design and flexible pricing, for long-term profitability. We show that an optimal product design balances durability-driven demand and price effects. Furthermore, for any given product design a profit-maximizing non-linear pricing schedule features retail price and sharing tariff in a robustly quadratic relationship, independent of the specifics of the consumer distribution. Various extensions, relating to the interaction of the firm’s policy with a sharing market and the possibility of time-varying sales distributions, are also considered.