Selling or Leasing? Pricing Information Goods with Depreciation of Consumer Valuation

Information Systems Research, Vol. 28, No. 3, pp. 585-602, 2017

Posted: 14 Dec 2013 Last revised: 1 May 2019

See all articles by Yifan Dou

Yifan Dou

Fudan University - School of Management

Yu Jeffrey Hu

Georgia Institute of Technology - Scheller College of Business

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business

Date Written: January 17, 2017

Abstract

Should a monopolistic vendor adopt the selling model or the leasing model for information goods or services? We study this question in the context of consumer valuation depreciation. Using a two-period game-theoretic model, we consider two types of consumer-side valuation depreciation for information goods or services: vintage depreciation and individual depreciation. Vintage depreciation assumes that a good or service loses some of its appeal to consumers as it becomes dated, and this effect persists independent of usage. Individual depreciation instead assumes that valuation depreciation happens only for consumers who have consumed or experienced the good or service. We identify conditions under which each pricing model is preferred. For vintage depreciation information goods, the leasing model dominates the selling model in vendor profit. For individual depreciation information goods, the selling model dominates the leasing model as long as the magnitude of individual depreciation exceeds a certain threshold; otherwise, leasing dominates selling. We consider several model extensions such as when network effects are present. Furthermore, we show a negative interaction effect between vintage depreciation and network effects in vendor profit; in contrast, the interaction effect between individual depreciation and network effects can be either negative or positive depending on the magnitude of individual depreciation. Managerial implications are also discussed.

Keywords: pricing strategies; selling; leasing; vintage depreciation; individual depreciation; network effects; information goods or services

JEL Classification: B21, D42, D62

Suggested Citation

Dou, Yifan and Hu, Yu Jeffrey and Wu, D. J., Selling or Leasing? Pricing Information Goods with Depreciation of Consumer Valuation (January 17, 2017). Information Systems Research, Vol. 28, No. 3, pp. 585-602, 2017. Available at SSRN: https://ssrn.com/abstract=2367183 or http://dx.doi.org/10.2139/ssrn.2367183

Yifan Dou

Fudan University - School of Management ( email )

670 Guoshun Rd
Yangpu District
Shanghai, Shanghai 200433
China

Yu Jeffrey Hu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

D. J. Wu

Georgia Institute of Technology - Ernest Scheller Jr. College of Business ( email )

800 West Peachtree Street, NW
Atlanta, GA 30308
United States
404-894-4364 (Phone)
404-894-6030 (Fax)

HOME PAGE: http://mgt.gatech.edu/wu

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