Pricing Durable Add-Ons: Selling vs. Leasing

Many firms offer products that consist of a durable base good (e.g., a vehicle) and a durable add-on (e.g., autopilot software). Some lease the add-on, whereas others sell it through intertemporal price discrimination or bundled pricing. Motivated by these practices, we examine whether a monopolistic firm should lease or sell the add-on when offering both durables. The literature suggests that leasing is preferable for a single durable good as it avoids the time inconsistency problem associated with selling. However, because leasing lacks an intertemporal link, it is less efficient than selling in balancing surplus extraction across consumers, leading to what we call the intraperiod imbalance problem. When the firm sells the base good, this can resolve the time inconsistency of add-on selling but perpetuate the intraperiod imbalance of add-on leasing. Thus, selling the add-on can be more profitable than leasing it. When the firm can choose between selling or leasing the base good, selling both the base good and the add-on can be more profitable than leasing both.