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Maintenance contracts for leased goods: their role in creating brand loyalty

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  • Julie Hunsaker

    (Department of Economics, Wayne State University, Detroit, MI, USA)

Abstract

Using a two-period switching cost model, this paper compares rental profit with sales profit in a framework in which duopolists produce horizontally differentiated durable goods. Rental firms use maintenance contracts that stipulate that repeat customers pay a lower fine per unit of damage than do those customers who switch to a rival firm. In the sales regime, firms give loyal customers a discount on their second period prices. If switching costs are zero, sales profit equals rental profit. For positive and identical switching costs, either regime can dominate. As the exogenous rate of depreciation falls, rental profit exceeds sales profit. Copyright © 2000 John Wiley & Sons, Ltd.

Suggested Citation

  • Julie Hunsaker, 2000. "Maintenance contracts for leased goods: their role in creating brand loyalty," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(7), pages 285-304.
  • Handle: RePEc:wly:mgtdec:v:21:y:2000:i:7:p:285-304
    DOI: 10.1002/mde.990
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    References listed on IDEAS

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    1. Gregory Goering & Michael Pippenger, 1996. "Durable Goods and Switching Costs," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 3(2), pages 201-212.
    2. Mann, Duncan P., 1992. "Durable goods monopoly and maintenance," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 65-79, March.
    3. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages 211-230, January.
    4. Jeremy Bulow, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 729-749.
    5. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    6. William James Adams & Janet L. Yellen, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 475-498.
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    Cited by:

    1. Patricia Mokhtarian & Taihyeong Lee & Sangho Choo, 2011. "A decomposition of trends in U.S. consumer expenditures on communications and travel: 1984–2002," Quality & Quantity: International Journal of Methodology, Springer, vol. 45(1), pages 1-19, January.

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