A key impediment to sharing is a lender’s concern about damage to a lent item due to unobservable actions by a renter, usually resulting in moral hazard. This paper shows how an intermediary can eliminate the moral hazard problem by providing optimal insurance to the lender and first-best incentives to the renter to exert care, as long as market participants are risk neutral. The solution is illustrated for the collaborative housing market but applies in principle to any sharing market with vertically differentiated goods. A population of renters, heterogeneous both in their preferences for housing quality and with respect to the amount of care they exert in a rental situation, face a choice between collaborative housing and staying at a local hotel. The private hosts choose their prices strategically, and the intermediary sets commission rates on both sides of the market as well as insurance terms for the rental agreement. The latter are set to eliminate moral hazard. The intermediary is able to extract the gains the hosts would earn if transacting directly. Finally, even if hotels set their prices at the outset so as to maximize collusive profits, collaborative housing persists at substantial market shares, regardless of the difference between the efficiencies of hosts and hotels to reduce renters’ cost of effort. The aggregate of hosts, intermediary, and hotels benefits from (a variety in) these effort costs, which indicates that the intermediated sharing of goods is an economically viable, robust phenomenon.
An introduction is presented to a special section of this issue on the role of information technology in corporate strategic planning, including the articles "Business Models for Monetizing Internet Applications and Web sites: Experience, Theory and Predictions," "An Empirical Investigation of the Value of Integrating Enterprise Information Systems: The Case of Medical Imaging Informatics" and "Information Security: Facilitating User Precautions Vis-a-Vis Enforcement Against Attackers."
In this paper we pursue three main objectives: (1) to develop a model of an intermediated search market in which matching between consumers and firms takes place primarily via paid referrals; (2) to address the question of designing a suitable mechanism for selling referrals to firms; and (3) to characterize and analyze the firms' bidding strategies given consumers' equilibrium search behavior. To achieve these objectives we develop a two-stage model of search intermediaries in a vertically differentiated product market. In the first stage an intermediary chooses a search engine design that specifies to which extent a firm's search rank is determined by its bid and to which extent it is determined by the product offering's performance. In the second stage, based on the search engine design, competing firms place their open bids to be paid for each referral by the search engine. We find that the revenue-maximizing search engine design bases rankings on a weighted average of product performance and bid amount. Nonzero pure-strategy equilibria of the underlying discontinuous bidding game generally exist but are not robust with respect to noisy clicks in the system. We determine a unique nondegenerate mixed-strategy Nash equilibrium that is robust to noisy clicks, In this equilibrium firms of low product performance fully dissipate their rents, which are appropriated by the search intermediary and the firm with the better product. The firms' expected bid amounts are generally nonmonotonic in product performance and depend on the search engine design parameter. The intermediary's profit-maximizing design choice, by attributing a positive weight to the firms' bids, tends to obfuscate search results and reduce overall consumer surplus compared to the socially optimal design of fully transparent results ranked purely on product performance.