Leasing and Selling: Optimal Marketing Strategies for a Durable Goods Firm

Abstract

This paper analyzes the problems associated with marketing a durable through leases and sales. Academic research in this area has argued that in a monopolistic environment, leasing dominates selling. Hence, leasing and selling should not co-exist and the firm should concentrate its efforts solely on leasing. We show that the relative profitability of leasing and selling hinges on the rates at which leased and sold units depreciate. In particular, we find that leasing does not dominate selling in all cases; if sold units depreciate at a significantly higher rate than leased units, a monopolistic firm is better off by only selling its product. In addition, we find that if leaded and sold products depreciate at different rates, then the optimal strategy for the firm involves a combination of both leasing and selling. We conclude the paper with an empirical analysis of the depreciation rates of leased and sold units of a popular car model. We find that the depreciation rate of leased cars has been significantly lower than the depreciation rate of sold cars.Leasing, Selling, Durable Goods, Automobiles

Understanding the Role of Trade-Ins in Durable Goods Markets: Theory and Evidence

“…There is a large literature on durable goods markets stretching back over three decades, and a number of marketing practices have been studied, including vertical coordination (Desai et al 2004), dual channels (Purohit 1997;Purohit and Staelin 1994), trade promotions (Bruce et al 2005), end consumer promotions (Bruce et al 2006) and leasing contracts (Desai and Purohit 1998). However, trade-in practices have received very limited attention.…”

Optimal Timing of Sequential Distribution: The Impact of Congestion Externalities and Day-and-Date Strategies

“…An important point being made is that a high rate of depreciation of the product being sold is helpful to the firm because it makes the good effectively more of a non-durable one. In our paper, congestion negatively affects the utility associated with the movie alternative, but, similar to Desai and Purohit (1998), it relaxes incentive compatibility constraints enabling the firm to better segment the movie and video markets. An interesting point made in our paper is that such an outcome can still prevail even when consumers themselves determine the equilibrium level of congestion by their consumption behavior (e.g., even under α H , if no consumer prefers to watch the movie then there are zero congestion costs).…”

“…If a consumer with quality sensitivity v ∈ V views the movie in a theater, her maximum willingness to pay is given by γ m v. Similarly, the inherent quality of the corresponding video is given by γ d > 0. Second, as discussed earlier, there is substantial decay in the quality of the film itself over time not because the content has changed but because it is steadily losing its relevance (akin to vintage-use depreciation in Desai and Purohit 1998). In that sense, we can consider the video to be essentially a different product at each moment in time.…”

“…In a broader context, sequential product introduction is related to intertemporal price discrimination (see, e.g., Coase 1972, Bulow 1982, Gul et al 1986, Besanko and Winston 1990, Desai and Purohit 1998, and Desai et al 2004. The papers in this literature demonstrate that a firm competes against itself by selling across different time periods without commitment.…”

“…The role of congestion here is connected to Desai and Purohit (1998) which studies the profitability of leasing versus selling strategies for a monopolist. A central element in their model is the mean depreciation factors under each strategy which determine how much residual value remains in bought and leased products as time passes.…”