How Does Leasing Affect Green Product Design?

Abstract

Leasing has been increasingly seen as a viable alternative to traditional business models. In this paper, we consider a manufacturer making decisions on green product design by accounting for the trade-off between traditional and environmental qualities under three business models, including a pure selling, a pure leasing, and a hybrid model with both selling and leasing. Under leasing, there exists the pooling effect that allows a manufacturer to meet consumer needs with fewer products. Since the pooling effect decreases the marginal cost of production, leasing produces positive incentives to increase product quality. However, the cannibalization effect within the product line distorts the incentives so that the pooling effect only increases the traditional quality rather than the environmental quality. As a result, leasing may have a negative impact on the average environmental quality of products. The manufacturer should make business model choices depending on some factors, including the types of markets, the usage cost, and the pooling effect. In general, when the pooling effect is strong, the manufacturer prefers a leasing or hybrid model to selling but designs products with lower environmental quality than selling. When the pooling effect is weak, the optimal decision should be made depending on the types of markets and the usage cost: in the high-end (low-end) market, the manufacturer should adopt a leasing or hybrid model only when the usage cost is high (low); the adoption of leasing or hybrid model can improve the average environmental quality.

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