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

  • Julie Hunsaker

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

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    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.

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    File URL: http://hdl.handle.net/10.1002/mde.990
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    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 21 (2000)
    Issue (Month): 7 ()
    Pages: 285-304

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    Handle: RePEc:wly:mgtdec:v:21:y:2000:i:7:p:285-304
    Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August.
    2. Schmalensee, Richard, 1984. "Gaussian Demand and Commodity Bundling," The Journal of Business, University of Chicago Press, vol. 57(1), pages S211-30, January.
    3. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
    4. Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 729-49, November.
    5. 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.
    6. Mann, Duncan P., 1992. "Durable goods monopoly and maintenance," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 65-79, March.
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