Channel Strategies for Durable Goods: Coexistence of Selling and Leasing to Individual and Corporate Consumers
27 Pages Posted: 20 Sep 2007
In durable goods markets, such as those for automobiles or computers, the coexistence of selling and leasing is common as is the existence of both corporate and individual consumers. Leases to the corporate consumers affect the price of used goods on the second-hand market which in turn affect the buying and leasing behavior of individual consumers. The setting of prices (or volumes) for sale and lease to individual and corporate consumers is a complicated problem for manufacturers.
We consider a manufacturer who concurrently sells and leases a finitely durable good to both individual and corporate consumers. The interaction between the manufacturer and consumers is modeled as a dynamic sequential game, where each player seeks to maximize its own payoff over an infinite horizon. We study how the corporate channel and substitutability of new goods and used goods affect the manufacturer's pricing decisions, consumer behavior and social welfare in the retail market.
Making a number of simplifying assumptions including two-period lifetime for the finitely durable goods, we show that all individual consumers follow Markov Perfect consumption strategies and based on their individual willingness to pay choose one of four two-period product bundles. They either (1) lease a new product every period, (2) repeatedly buying a new good and use it for two periods, (3) always buy used goods, and (4) do not participate in the market. We show that when used goods are poor substitutes for new goods, as the manufacturer increases her leasing volume in the corporate channel, she optimally raises her leasing price to individual consumers, but may not necessarily adjust the selling price of new goods. As the retail lease price rises, retail consumers that prefer leasing experience a loss in surplus. However, aggregate consumer surplus increases with increase in corporate leasing. On the other hand, when used goods are close substitutes for new goods, with increased corporate leasing, the manufacturer stops leasing to individual consumers and raises retail sales prices.
Keywords: Channels of Distribution, Selling and Leasing, Durable Goods, Game Theory, Market
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