Implications of Channel Structure and Operational Mode Upon a Manufacturer's Durability Choice
43 Pages Posted: 4 Apr 2013 Last revised: 13 Sep 2013
Date Written: June 15, 2013
We explore the interactions between channel structure and mode of operations (leasing versus selling) and their implications for a manufacturer's willingness to invest in making her product more durable. Using a centralized manufacturer who leases her product as a point of reference, we find that an isolated change in either the channel structure (centralized to decentralized), or the operational mode (leasing to selling) can decrease the manufacturer's willingness to provide durability. However, if combined, these two changes together may strengthen the manufacturer's willingness to invest in durability. Consequently, a manufacturer who sells through an intermediary may invest more in durability than one who leases directly to end consumers. This result challenges the conventional wisdom in two different paradigms. First, from the perspective that durability is a dimension of quality, it challenges the conventional view that decentralization will decrease a manufacturer's incentive to provide a high quality product. Second, from the perspective of the externality that is created when a firm sells a durable product to strategic consumers who anticipate declining prices, it challenges the conventional view that a manufacturer who leases will provide more durability than one who sells.
Keywords: channels, durable goods, leasing and selling, investment
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