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

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