IDEAS home Printed from https://ideas.repec.org/a/eee/ejores/v266y2018i3p1044-1061.html
   My bibliography  Save this article

Selling or leasing? Dynamic pricing of software with upgrades

Author

Listed:
  • Jia, Kunhao
  • Liao, Xiuwu
  • Feng, Juan

Abstract

In this paper, we analyze the profitability of a selling and a leasing model by considering both software upgrades and different price discrimination strategies in a two-period model framework. Three price discrimination strategies are considered: inter-temporal, behavior-based, and a hybrid price discrimination strategy. We find that consumers’ inter-temporal purchase behaviors and a vendor's choice of price discrimination strategies make it possible for a selling model to be more profitable than a leasing model. More specifically, if the monopolist cannot commit to never using information about consumers’ past purchase behavior for price discrimination, the selling model is more profitable than the leasing model. We also find that if a selling model is adopted, the monopolist should choose the behavior-based price discrimination strategy with a reward for returning consumers; but if a leasing model is adopted, the monopolist should choose the inter-temporal price discrimination strategy with a rising price. We also extend our model to a duopoly market. Different from a monopoly case, we find that the selling model dominates the leasing model under the hybrid strategy, while these two models are equally profitable under the inter-temporal strategy. These findings provide new insights into the comparison of the selling and leasing models.

Suggested Citation

  • Jia, Kunhao & Liao, Xiuwu & Feng, Juan, 2018. "Selling or leasing? Dynamic pricing of software with upgrades," European Journal of Operational Research, Elsevier, vol. 266(3), pages 1044-1061.
  • Handle: RePEc:eee:ejores:v:266:y:2018:i:3:p:1044-1061
    DOI: 10.1016/j.ejor.2017.10.063
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S037722171730992X
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Amit Pazgal & David Soberman, 2008. "Behavior-Based Discrimination: Is It a Winning Play, and If So, When?," Marketing Science, INFORMS, vol. 27(6), pages 977-994, 11-12.
    2. Sam Bucovetsky & John Chilton, 1986. "Concurrent Renting and Selling in a Durable-Goods Monopoly under Threat of Entry," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 261-275, Summer.
    3. Bernard Caillaud & Romain de Nijs, 2011. "Strategic loyalty reward in dynamic price Discrimination," PSE Working Papers halshs-00622291, HAL.
    4. Alessandro Acquisti & Hal R. Varian, 2005. "Conditioning Prices on Purchase History," Marketing Science, INFORMS, vol. 24(3), pages 367-381, May.
    5. Kevin Xiaoguo Zhu & Zach Zhizhong Zhou, 2012. "Research Note ---Lock-In Strategy in Software Competition: Open-Source Software vs. Proprietary Software," Information Systems Research, INFORMS, vol. 23(2), pages 536-545, June.
    6. J. Miguel Villas-Boas, 2004. "Consumer Learning, Brand Loyalty, and Competition," Marketing Science, INFORMS, vol. 23(1), pages 134-145, December.
    7. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-332, April.
    8. Hung-Ken Chien & C. Y. Cyrus Chu, 2008. "Sale or Lease? Durable-Goods Monopoly with Network Effects," Marketing Science, INFORMS, vol. 27(6), pages 1012-1019, 11-12.
    9. Preyas S. Desai & Devavrat Purohit, 1999. "Competition in Durable Goods Markets: The Strategic Consequences of Leasing and Selling," Marketing Science, INFORMS, vol. 18(1), pages 42-58.
    10. Sreekumar R. Bhaskaran & Stephen M. Gilbert, 2005. "Selling and Leasing Strategies for Durable Goods with Complementary Products," Management Science, INFORMS, vol. 51(8), pages 1278-1290, August.
    11. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    12. Stephen M. Gilbert & Ramandeep S. Randhawa & Haoying Sun, 2014. "Optimal Per-Use Rentals and Sales of Durable Products and Their Distinct Roles in Price Discrimination," Production and Operations Management, Production and Operations Management Society, vol. 23(3), pages 393-404, March.
    13. Ramesh Sankaranarayanan, 2007. "Innovation and the Durable Goods Monopolist: The Optimality of Frequent New-Version Releases," Marketing Science, INFORMS, vol. 26(6), pages 774-791, 11-12.
    14. Greg Shaffer & Z. John Zhang, 2000. "Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 397-424, June.
    15. Bing Jing, 2011. "Pricing Experience Goods: The Effects of Customer Recognition and Commitment," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 20(2), pages 451-473, June.
    16. Glenn Ellison & Drew Fudenberg, 2000. "The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 253-272, Summer.
    17. Khouja, Moutaz & Smith, Michael Alan, 2007. "Optimal pricing for information goods with piracy and saturation effect," European Journal of Operational Research, Elsevier, vol. 176(1), pages 482-497, January.
    18. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
    19. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    20. Drew Fudenberg & Jean Tirole, 1998. "Upgrades, Tradeins, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 235-258, Summer.
    21. Schmidt Klaus M., 1993. "Commitment through Incomplete Information in a Simple Repeated Bargaining Game," Journal of Economic Theory, Elsevier, vol. 60(1), pages 114-139, June.
    22. Amit Mehra & Abraham Seidmann & Probal Mojumder, 2014. "Product Life-Cycle Management of Packaged Software," Production and Operations Management, Production and Operations Management Society, vol. 23(3), pages 366-378, March.
    23. Kutsal Doğan & Yonghua Ji & Vijay S. Mookerjee & Suresh Radhakrishnan, 2011. "Managing the Versions of a Software Product Under Variable and Endogenous Demand," Information Systems Research, INFORMS, vol. 22(1), pages 5-21, March.
    24. Anirudh Dhebar, 1994. "Durable-Goods Monopolists, Rational Consumers, and Improving Products," Marketing Science, INFORMS, vol. 13(1), pages 100-120.
    25. Amit Mehra & Ram Bala & Ramesh Sankaranarayanan, 2012. "Competitive Behavior-Based Price Discrimination for Software Upgrades," Information Systems Research, INFORMS, vol. 23(1), pages 60-74, March.
    26. Herbon, Avi & Khmelnitsky, Eugene, 2017. "Optimal dynamic pricing and ordering of a perishable product under additive effects of price and time on demand," European Journal of Operational Research, Elsevier, vol. 260(2), pages 546-556.
    27. Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
    28. John Kennan, 2001. "Repeated Bargaining with Persistent Private Information," Review of Economic Studies, Oxford University Press, vol. 68(4), pages 719-755.
    29. Jiwoong Shin & K. Sudhir & Dae-Hee Yoon, 2012. "When to "Fire" Customers: Customer Cost-Based Pricing," Management Science, INFORMS, vol. 58(5), pages 932-947, May.
    30. Chen, Zhiyuan & Liang, Xiaoying & Xie, Lei, 2016. "Inter-temporal price discrimination and satiety-driven repeat purchases," European Journal of Operational Research, Elsevier, vol. 251(1), pages 225-236.
    31. Laura J. Kornish, 2001. "Pricing for a Durable-Goods Monopolist Under Rapid Sequential Innovation," Management Science, INFORMS, vol. 47(11), pages 1552-1561, November.
    32. Bernard Caillaud & Romain De Nijs, 2014. "Strategic Loyalty Reward in Dynamic Price Discrimination," Marketing Science, INFORMS, vol. 33(5), pages 725-742, September.
    33. Jiwoong Shin & K. Sudhir, 2010. "A Customer Management Dilemma: When Is It Profitable to Reward One's Own Customers?," Marketing Science, INFORMS, vol. 29(4), pages 671-689, 07-08.
    34. J. Miguel Villas-Boas, 2004. "Price Cycles in Markets with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 35(3), pages 486-501, Autumn.
    35. Fan, Ming & Kumar, Subodha & Whinston, Andrew B., 2009. "Short-term and long-term competition between providers of shrink-wrap software and software as a service," European Journal of Operational Research, Elsevier, vol. 196(2), pages 661-671, July.
    36. Xiong, Yu & Zhao, Pei & Xiong, Zhongkai & Li, Gendao, 2016. "The impact of product upgrading on the decision of entrance to a secondary market," European Journal of Operational Research, Elsevier, vol. 252(2), pages 443-454.
    37. Dasu, Sriram & Tong, Chunyang, 2010. "Dynamic pricing when consumers are strategic: Analysis of posted and contingent pricing schemes," European Journal of Operational Research, Elsevier, vol. 204(3), pages 662-671, August.
    38. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    39. Nabita Penmetsa & Esther Gal-Or & Jerrold May, 2015. "Dynamic Pricing of New Services in Subscription Markets," Production and Operations Management, Production and Operations Management Society, vol. 24(6), pages 896-916, June.
    40. J. Miguel Villas-Boas, 1999. "Dynamic Competition with Customer Recognition," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 604-631, Winter.
    41. Yongmin Chen & Jason Pearcy, 2010. "Dynamic pricing: when to entice brand switching and when to reward consumer loyalty," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 674-685.
    42. repec:bla:popmgt:v:26:y:2017:i:2:p:320-340 is not listed on IDEAS
    43. Preyas Desai & Devavrat Purohit, 1998. "Leasing and Selling: Optimal Marketing Strategies for a Durable Goods Firm," Management Science, INFORMS, vol. 44(11-Part-2), pages 19-34, November.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ejores:v:266:y:2018:i:3:p:1044-1061. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/eor .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.