For any of you who have a car, you might have had the experience of getting a tire blown and have to pay for it. This is not a big problem. The automobile industry needs to profit and you need a tire, so it seems like a win win situation. Unfortunately there is an incentive misalignment.
Michellin profits whenever you need a replacement tire. The more often you need a replacement tire the more they get paid. As such there is no reason for them to improve the quality of their tires.
That is problematic. How can we solve it?
There are a few companies selling tires under the Product as a Service framework. Instead of paying per tire, you are being paid per kilometer driven. This is being possible due to the diminishing costs of technology. In particular, Michellin is equipping tires with sensors that measure the distance traveled, temperature, weariness and many others. This way they are able to charge for the number of kilometers driven. Not only that but they are kept up to date about the tires weariness and can inform their clients about needed tire changes if needed.
Great, so we have a solution.
Lets not jump to conclusions too fast. We need to consider the incentives in case A (pay per tire) and case B (pay per kilometer)
Case A
Since we are paying per tire Michellin has no incentive to improve the quality of the tires. Clients have to be careful in their driving in order to avoid unneeded costs. By default costs associated with tire replacement are paid by the Client.
Case B
Since we are paying per mile it is in Michellin’s best interest to minimize their cost per km driven, hence making better tires. By default costs associated with tire replacement are paid by Michellin. Michellin is also able to call clients for a tire change if their sensors raise any alarms. Clients do not need to worry as much about wearing out tires.
So you agree that Case B is best, right?
Definitely yes, but I wanted to bring attention to the incentives in play. By Michellin’s own initiative they were able to change the company incentives so that investing in durable tires is in the company’s best interest. When possible aligning society’s interests with a company’s interests is more powerful than legislation or company claims to do so when research and other company sectors might not be transparent to the public.
There are many industries where similar changes can be made, so do share any ideas that come to your mind.
Kudos to Michellin for doing this out of their own initiative. I don’t believe this option (pay per kilometer) is available to everyday single car customers, but this solution is being rolled out already to fleet owners (be it trucks, airplanes or other wheeled vehicles).