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

  • Preyas Desai

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

  • Devavrat Purohit

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

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    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.

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    File URL: http://dx.doi.org/10.1287/mnsc.44.11.S19
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 44 (1998)
    Issue (Month): 11-Part-2 (November)
    Pages: S19-S34

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    Handle: RePEc:inm:ormnsc:v:44:y:1998:i:11-part-2:p:s19-s34
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    1. John Conlisk & Eitan Gerstner & Joel Sobel, 1984. "Cyclic Pricing by a Durable Goods Monopolist," The Quarterly Journal of Economics, Oxford University Press, vol. 99(3), pages 489-505.
    2. 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.
    3. DeGraba, Patrick, 1994. "No Lease is Short Enough to Solve the Time Inconsistency Problem," Journal of Industrial Economics, Wiley Blackwell, vol. 42(4), pages 361-74, December.
    4. Daniel A. Levinthal & Devavrat Purohit, 1989. "Durable Goods and Product Obsolescence," Marketing Science, INFORMS, vol. 8(1), pages 35-56.
    5. 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.
    6. K. Sridhar Moorthy, 1984. "Market Segmentation, Self-Selection, and Product Line Design," Marketing Science, INFORMS, vol. 3(4), pages 288-307.
    7. Kahn, Charles M, 1986. "The Durable Goods Monopolist and Consistency with Increasing Costs," Econometrica, Econometric Society, vol. 54(2), pages 275-94, March.
    8. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
    9. 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.
    10. Mann, Duncan P., 1992. "Durable goods monopoly and maintenance," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 65-79, March.
    11. 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.
    12. Devavrat Purohit, 1992. "Exploring the Relationship Between the Markets for New and Used Durable Goods: The Case of Automobiles," Marketing Science, INFORMS, vol. 11(2), pages 154-167.
    13. 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.
    14. Bagnoli, Mark & Salant, Stephen W & Swierzbinski, Joseph E, 1989. "Durable-Goods Monopoly with Discrete Demand," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1459-78, December.
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