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

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  • Preyas Desai

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

  • Devavrat Purohit

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

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.

Suggested Citation

  • 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.
    • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:11-part-2:p:s19-s34
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    File URL: http://dx.doi.org/10.1287/mnsc.44.11.S19
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    References listed on IDEAS

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    11. Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 61-92, April.
    12. K. Sridhar Moorthy & I. P. L. Png, 1992. "Market Segmentation, Cannibalization, and the Timing of Product Introductions," Management Science, INFORMS, vol. 38(3), pages 345-359, March.
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    Keywords

    Leasing; Selling; Durable Goods; Automobiles;

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