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

38 Pages Posted: 26 Sep 2012 Last revised: 18 Dec 2012

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

Date Written: September 17, 2012

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.

Keywords: rentals, sales, durable products, price discrimination

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: https://ssrn.com/abstract=2151969 or http://dx.doi.org/10.2139/ssrn.2151969

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 - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

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