How does providing car sharing affect car manufacturers’ incentive to produce efficient vehicles?

What is it about?

Car sharing programs allow members to access a fleet of vehicles that they can use for personal transportation; users are then billed based on the length of time they removed the car from the pool of shared vehicles. The car sharing provider is responsible for gas, maintenance, and insurance. In doing so the fixed costs of car ownership are transformed into variable costs. Although the model of car sharing was initially introduced by third-party providers like Zipcar, OEMs like Daimler and BMW have been particularly active in introducing car sharing programs. Motivated by the OEMs’ growing interest in the car sharing business, we developed a model to determine how introducing a car sharing program affects an OEM’s: (1) profits, (2) environmental impact, (3) incentive to produce vehicles of high fuel efficiency and (4) ability to comply with the Corporate Average Fuel Economy (CAFE) standards. We found that higher-end OEMs (i.e., OEMs typically producing vehicles of higher driving performance but lower fuel efficiency) can benefit more from introducing car sharing programs. Introducing car sharing allows OEMs to also provide vehicles of higher efficiency. Lastly, our model suggests that unless OEMs are granted incentive multipliers so that each shared vehicle counts as more than one in the calculation of their CAFE performance, car-sharing may hinder their ability to meet the enacted CAFE standards.

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Why is it important?

There is growing evidence of OEMs undergoing the transformation from strictly selling cars to becoming mobility solution providers. Our paper shows that such a transformation makes economic sense. This can incentivize more OEMs to participate in the car sharing business. Furthermore, the production and operation of vehicles represents a very large environmental impact. Environmental regulations, specifically CAFE standards, are designed to encourage OEMs to increase their overall fleet efficiency by increasing individual fuel efficiency and sales of fuel efficient models. Our study shows that car sharing can reduce the OEM’s environmental impact. However, car-sharing programs do not necessarily improve the OEM’s compliance with the CAFE regulation since they can decrease the overall number of high efficiency vehicles produced. Our study suggests that this issue can be addressed if OEMs offering car sharing are granted incentive multipliers so that each shared car they provide counts as more than one vehicle in the compliance calculation. Environmental regulations need to be adapted for car sharing to realize its full environmental value and for OEMs to embrace it as a viable business model.

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