IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Competition in Durable Goods Markets: The Strategic Consequences of Leasing and Selling

Listed author(s):
  • Preyas S. Desai

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

  • Devavrat Purohit

    (Fuqua School of Business, Duke University, Durham, North Carolina 27708)

Registered author(s):

    In marketing durable goods, manufacturers use varying degrees of leasing and selling to consumers, e.g., cars, photo-copiers, personal computers, airplanes, etc. The question that this raises is whether the distinction between leases and sales is simply one of price, or whether the proportion of leases and sales effects a firm's ability to compete in the market. In this paper we use two approaches to argue that leasing and selling create strategic consequences that extend beyond prices. First, we develop a stylized theoretical model that shows that the optimal proportion of leases and sales depends on the competitiveness of the market and on the inherent reliability of the firm's product. And second, we find support for the implications of our theoretical model with data from the automobile industry. The U.S. automobile industry has seen a large increase in leasing over the last five years. However, the extent to which leasing has been embraced varies widely across manufacturers. For example, in 1993 the sport utility segment had the following lease percentages: Ford Explorer, 29%; Jeep Grand Cherokee, 24%; Toyota 4-Runner, 11%; and Chevrolet Blazer, 9%. In addition, manufacturers often vary lease percentages across models. For example, in 1993 Ford leased 22% of its Crown Victoria model, 35% of its Taurus model, and 42% of its Probe model. A popular argument for why we see these differences is that higher priced cars are leased more often because leasing makes them more “affordable.” However, this rationale is not compelling in the face of our data. For example, the Ford Probe was priced significantly lower than the Crown Victoria and yet it was leased almost twice as often. To develop a better understanding of why we observe differences in the proportion of leasing, we develop a two-period model of a duopoly in which each manufacturer chooses its optimal quantity and the fraction of units it wants to lease. We find that in equilibrium neither firm leases all its units—either they use a mix of leasing and selling or they use only selling. Our analysis suggests that the fraction of leased cars decreases as the manufacturers' products become more similar and the competition between them increases. The intuition for this result is that a higher fraction of leases puts the firm at a competitive disadvantage in the future. This occurs because, unlike firms that sell their product, firms that lease are at a price disadvantage. Another important finding in this paper is that the extent of leasing chosen by a manufacturer depends on the reliability of its product. In particular, all else being equal, the lower a product's reliability, the lower its proportion of leases. Within the context of the automobile industry, this suggests that more expensive cars may be leased more often because they are of higher quality and not necessarily because they are more expensive. Finally, we test the implications of our theoretical model with data from the U.S. automobile market. In particular, for 1993 model year cars, we develop a measure of reliability using data from . In addition, we develop a measure of the extent of competition in each segment of the automobile market. We support our hypotheses by finding that the extent to which a car model is leased depends strongly on its predicted reliability and on the competitive intensity within the segment.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://dx.doi.org/10.1287/mksc.18.1.42
    Download Restriction: no

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 18 (1999)
    Issue (Month): 1 ()
    Pages: 42-58

    as
    in new window

    Handle: RePEc:inm:ormksc:v:18:y:1999:i:1:p:42-58
    Contact details of provider: Postal:
    7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page: http://www.informs.org/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. 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.
    2. Anne T. Coughlan & Birger Wernerfelt, 1989. "On Credible Delegation by Oligopolists: A Discussion of Distribution Channel Management," Management Science, INFORMS, vol. 35(2), pages 226-239, February.
    3. Timothy W. McGuire & Richard Staelin, 1983. "An Industry Equilibrium Analysis of Downstream Vertical Integration," Marketing Science, INFORMS, vol. 2(2), pages 161-191.
    4. Eric W. Bond & Larry Samuelson, 1984. "Durable Good Monopolies with Rational Expectations and Replacement Sales," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 336-345, Autumn.
    5. Rajiv Lal, 1990. "Improving Channel Coordination Through Franchising," Marketing Science, INFORMS, vol. 9(4), pages 299-318.
    6. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
    7. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June.
    8. Jeremy Bulow, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 729-749.
    9. 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)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:inm:ormksc:v:18:y:1999:i:1:p:42-58. 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: (Mirko Janc)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.