Abstract

http://ssrn.com/abstract=2151969
 


 



Optimal Per-Use Rentals and Sales of Durable Products and Their Distinct Roles in Price Discrimination


Stephen Gilbert


University of Texas at Austin - McCombs School of Business

Ramandeep S. Randhawa


University of Southern California

Haoying Sun


Texas A&M University - Mays Business School

September 17, 2012

Mays Business School Research Paper No. 2012-78

Abstract:     
We consider a setting in which consumers experience distinct instances of need for a durable product at random intervals. Each instance of need is associated with a random utility and the consumers are differentiated according to the frequency with which they experience such instances of need. We use our model of consumer utility to characterize the firm's optimal strategy of whether to sell, rent, or do a combination of both in terms of the transaction costs and consumers' usage characteristics. We find that the two modes of operation serve different roles in allowing the firm to price discriminate. While sales allow the firm to discriminate among consumers of different usage frequencies, rentals allow it to discriminate according to consumers' realized valuations. Consequently, even when transaction costs are negligible, it is often optimal for the firm to simultaneously rent and sell its product. In addition, we find that although sales and rentals are substitutes and that the offering of sales weakly increases rental prices, it is possible that the introduction of rentals to a pure selling operation can either increase or decrease the optimal sales prices.

Number of Pages in PDF File: 38

Keywords: rentals, sales, durable products, price discrimination

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Date posted: September 26, 2012 ; Last revised: December 18, 2012

Suggested Citation

Gilbert, Stephen and Randhawa, Ramandeep S. and Sun, Haoying, Optimal Per-Use Rentals and Sales of Durable Products and Their Distinct Roles in Price Discrimination (September 17, 2012). Mays Business School Research Paper No. 2012-78. Available at SSRN: http://ssrn.com/abstract=2151969 or http://dx.doi.org/10.2139/ssrn.2151969

Contact Information

Stephen Gilbert
University of Texas at Austin - McCombs School of Business ( email )
Austin, TX 78712
United States
Ramandeep S. Randhawa (Contact Author)
University of Southern California ( email )
Marshall School of Business
BRI 401, 3670 Trousdale Parkway
Los Angeles, CA 90089
United States
Haoying Sun
Texas A&M University (TAMU) - Mays Business School ( email )
Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States
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