IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v67y2021i11p6782-6802.html
   My bibliography  Save this article

Leasing, Modularity, and the Circular Economy

Author

Listed:
  • Vishal Agrawal

    (McDonough School of Business, Georgetown University, Washington, District of Columbia 20057)

  • Atalay Atasu

    (Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308; INSEAD, Fontainebleau 77370, France)

  • Sezer Ülkü

    (McDonough School of Business, Georgetown University, Washington, District of Columbia 20057)

Abstract

We investigate the economic and environmental implications of jointly implementing leasing and modularity, two prominent circular economy strategies, and their interaction. We develop a durable goods model to obtain insights for firms considering the use of these strategies. We first analyze the effect of adopting leasing on a firm’s product architecture choice. We find that a modular product architecture is more attractive under leasing only if off-lease products depreciate to a greater extent. We next analyze the effect of adopting a modular product architecture on the firm’s business model choice. We find that adopting a modular architecture can cause a leasing firm to switch to selling but will not lead a selling firm to switch to leasing. Building on these results, we show that leasing a modular product is preferred by the firm only under limited conditions (i.e., when production costs are low, off-lease products are in relatively better condition, and when there is a large difference between depreciation levels of different modules). Finally, we show that jointly implementing leasing and modularity can also lead to higher environmental impact than only adopting leasing or modularity in isolation.

Suggested Citation

  • Vishal Agrawal & Atalay Atasu & Sezer Ülkü, 2021. "Leasing, Modularity, and the Circular Economy," Management Science, INFORMS, vol. 67(11), pages 6782-6802, November.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:11:p:6782-6802
    DOI: 10.1287/mnsc.2020.3829
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2020.3829
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2020.3829?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Işıl & Vishal V. Agrawal & Atalay Atasu, 2020. "Extended Producer Responsibility for Durable Products," Manufacturing & Service Operations Management, INFORMS, vol. 22(2), pages 364-382, March.
    2. 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.
    3. Walter R. Stahel, 2016. "The circular economy," Nature, Nature, vol. 531(7595), pages 435-438, March.
    4. Sezer Ülkü & Claudiu V. Dimofte & Glen M. Schmidt, 2012. "Consumer Valuation of Modularly Upgradeable Products," Management Science, INFORMS, vol. 58(9), pages 1761-1776, September.
    5. Atalay Atasu & Miklos Sarvary & Luk N. Van Wassenhove, 2008. "Remanufacturing as a Marketing Strategy," Management Science, INFORMS, vol. 54(10), pages 1731-1746, October.
    6. Vish Krishnan & Karthik Ramachandran, 2011. "Integrated Product Architecture and Pricing for Managing Sequential Innovation," Management Science, INFORMS, vol. 57(11), pages 2040-2053, November.
    7. Chialin Chen, 2001. "Design for the Environment: A Quality-Based Model for Green Product Development," Management Science, INFORMS, vol. 47(2), pages 250-263, February.
    8. Fixson, Sebastian K., 2007. "Modularity and Commonality Research: Past Developments and Future Opportunities," Working papers 37145, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Vishal V. Agrawal & Atalay Atasu & Luk N. Van Wassenhove, 2019. "OM Forum—New Opportunities for Operations Management Research in Sustainability," Service Science, INFORMS, vol. 21(1), pages 1-12, January.
    10. Charles J. Corbett & Gregory A. DeCroix, 2001. "Shared-Savings Contracts for Indirect Materials in Supply Chains: Channel Profits and Environmental Impacts," Management Science, INFORMS, vol. 47(7), pages 881-893, July.
    11. Vishal V. Agrawal & Stylianos Kavadias & L. Beril Toktay, 2016. "The Limits of Planned Obsolescence for Conspicuous Durable Goods," Manufacturing & Service Operations Management, INFORMS, vol. 18(2), pages 216-226, May.
    12. Laurens G. Debo & L. Beril Toktay & Luk N. Van Wassenhove, 2005. "Market Segmentation and Product Technology Selection for Remanufacturable Products," Management Science, INFORMS, vol. 51(8), pages 1193-1205, August.
    13. Karan Girotra & Serguei Netessine, 2013. "OM Forum —Business Model Innovation for Sustainability," Manufacturing & Service Operations Management, INFORMS, vol. 15(4), pages 537-544, October.
    14. Fixson, Sebastian K., 2007. "Modularity and Commonality Research: Past Developments and Future Opportunities," Working papers 37286, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    15. S. Huang & Y. Yang & K. Anderson, 2001. "A Theory of Finitely Durable Goods Monopoly with Used-Goods Market and Transaction Costs," Management Science, INFORMS, vol. 47(11), pages 1515-1532, November.
    16. Tim Kraft & Gal Raz, 2017. "Collaborate or Compete: Examining Manufacturers' Replacement Strategies for a Substance of Concern," Production and Operations Management, Production and Operations Management Society, vol. 26(9), pages 1646-1662, September.
    17. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    18. Vishal V. Agrawal & Mark Ferguson & L. Beril Toktay & Valerie M. Thomas, 2012. "Is Leasing Greener Than Selling?," Management Science, INFORMS, vol. 58(3), pages 523-533, March.
    19. 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.
    20. Nancy M. P. Bocken & Elsa A. Olivetti & Jonathan M. Cullen & José Potting & Reid Lifset, 2017. "Taking the Circularity to the Next Level: A Special Issue on the Circular Economy," Journal of Industrial Ecology, Yale University, vol. 21(3), pages 476-482, June.
    21. 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.
    22. V. Daniel R. Guide & Luk N. Van Wassenhove, 2009. "OR FORUM---The Evolution of Closed-Loop Supply Chain Research," Operations Research, INFORMS, vol. 57(1), pages 10-18, February.
    23. 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.
    24. Michael K. Lim & Ho-Yin Mak & Ying Rong, 2015. "Toward Mass Adoption of Electric Vehicles: Impact of the Range and Resale Anxieties," Manufacturing & Service Operations Management, INFORMS, vol. 17(1), pages 101-119, February.
    25. Ulrich, Karl, 1995. "The role of product architecture in the manufacturing firm," Research Policy, Elsevier, vol. 24(3), pages 419-440, May.
    26. Buket Avci & Karan Girotra & Serguei Netessine, 2015. "Electric Vehicles with a Battery Switching Station: Adoption and Environmental Impact," Management Science, INFORMS, vol. 61(4), pages 772-794, April.
    27. Karthik Ramachandran & V. Krishnan, 2008. "Design Architecture and Introduction Timing for Rapidly Improving Industrial Products," Manufacturing & Service Operations Management, INFORMS, vol. 10(1), pages 149-171, December.
    28. 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)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen Jin & Luyi Yang & Cungen Zhu, 2023. "Right to Repair: Pricing, Welfare, and Environmental Implications," Management Science, INFORMS, vol. 69(2), pages 1017-1036, February.
    2. Işıl & Vishal V. Agrawal & Atalay Atasu, 2020. "Extended Producer Responsibility for Durable Products," Manufacturing & Service Operations Management, INFORMS, vol. 22(2), pages 364-382, March.
    3. Vishal V. Agrawal & Sezer Ülkü, 2013. "The Role of Modular Upgradability as a Green Design Strategy," Manufacturing & Service Operations Management, INFORMS, vol. 15(4), pages 640-648, October.
    4. Erzurumlu, S. Sinan, 2013. "The compatibility of durable goods with contingent generic consumables," Omega, Elsevier, vol. 41(3), pages 574-585.
    5. Tianqin Shi & Dilip Chhajed & Zhixi Wan & Yunchuan Liu, 2020. "Distribution Channel Choice and Divisional Conflict in Remanufacturing Operations," Production and Operations Management, Production and Operations Management Society, vol. 29(7), pages 1702-1719, July.
    6. Aditya Vedantam & Emre M. Demirezen & Subodha Kumar, 2021. "Trade‐In or Sell in My P2P Marketplace: A Game Theoretic Analysis of Profit and Environmental Impact," Production and Operations Management, Production and Operations Management Society, vol. 30(11), pages 3923-3942, November.
    7. Baojun Jiang & Lin Tian, 2018. "Collaborative Consumption: Strategic and Economic Implications of Product Sharing," Management Science, INFORMS, vol. 64(3), pages 1171-1188, March.
    8. Vishal V. Agrawal & Stylianos Kavadias & L. Beril Toktay, 2016. "The Limits of Planned Obsolescence for Conspicuous Durable Goods," Manufacturing & Service Operations Management, INFORMS, vol. 18(2), pages 216-226, May.
    9. Vishal V. Agrawal & Mark Ferguson & L. Beril Toktay & Valerie M. Thomas, 2012. "Is Leasing Greener Than Selling?," Management Science, INFORMS, vol. 58(3), pages 523-533, March.
    10. Pangburn, Michael S. & Stavrulaki, Euthemia, 2014. "Take back costs and product durability," European Journal of Operational Research, Elsevier, vol. 238(1), pages 175-184.
    11. Yuxiang Zhang & Deqing Tan & Zhi Liu, 2019. "Leasing or Selling? Durable Goods Manufacturer Marketing Model Selection under a Mixed Carbon Trading-and-Tax Policy Scenario," IJERPH, MDPI, vol. 16(2), pages 1-29, January.
    12. Ximin (Natalie) Huang & Atalay Atasu & L. Beril Toktay, 2019. "Design Implications of Extended Producer Responsibility for Durable Products," Management Science, INFORMS, vol. 67(6), pages 2573-2590, June.
    13. Vishal V. Agrawal & Ioannis Bellos, 2017. "The Potential of Servicizing as a Green Business Model," Management Science, INFORMS, vol. 63(5), pages 1545-1562, May.
    14. Jiang, Zhong-Zhong & Feng, Guangqi & Yi, Zelong, 2021. "How should a capital-constrained servicizing manufacturer search for financing? The impact of supply chain leadership," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 145(C).
    15. Nektarios Oraiopoulos & Mark E. Ferguson & L. Beril Toktay, 2012. "Relicensing as a Secondary Market Strategy," Management Science, INFORMS, vol. 58(5), pages 1022-1037, May.
    16. Fuqiang Zhang & Renyu Zhang, 2018. "Trade-in Remanufacturing, Customer Purchasing Behavior, and Government Policy," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 601-616, October.
    17. Kanatlı, Mehmet Ali & Karaer, Özgen, 2022. "Servitization as an alternative business model and its implications on product durability, profitability & environmental impact," European Journal of Operational Research, Elsevier, vol. 301(2), pages 546-560.
    18. Ece G. Gülserliler & Joseph D. Blackburn & Luk N. Van Wassenhove, 2022. "Consumer acceptance of circular business models and potential effects on economic performance: The case of washing machines," Journal of Industrial Ecology, Yale University, vol. 26(2), pages 509-521, April.
    19. Lacourbe, Paul, 2016. "Durable goods leasing in the presence of exporting used products to an international secondary market," European Journal of Operational Research, Elsevier, vol. 250(2), pages 448-456.
    20. Jian Li & Huan Wang & Zhiwen Deng & Wen Zhang & Guoqing Zhang, 2022. "Leasing or selling? The channel choice of durable goods manufacturer considering consumers’ capital constraint," Flexible Services and Manufacturing Journal, Springer, vol. 34(2), pages 317-350, June.

    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:inm:ormnsc:v:67:y:2021:i:11:p:6782-6802. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.