Selling and Leasing Strategies for Durable Goods with Complementary Products

27 Pages Posted: 23 Aug 2005 Last revised: 17 Jul 2008

See all articles by Sreekumar R. Bhaskaran

Sreekumar R. Bhaskaran

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM)

Stephen Gilbert

University of Texas at Austin - McCombs School of Business

Date Written: April 1, 2005

Abstract

It has been recognized that when a durable goods manufacturer sells her output, she has an incentive to produce at a rate that will drive down the market price of her product over time. Because anticipation of declining prices makes consumers less willing to invest in owning the durable good, selling can be self-defeating for the manufacturer. If instead, the manufacturer leases her product, she can eliminate her own incentive to decrease the price over time, which allows her to extract larger rents from consumers. In this paper, we investigate how a durable goods manufacturer's choice between leasing and selling is affected by a complementary product that is produced by an independent firm. We show that a durable goods manufacturer who leases her product has an incentive to increase prices (by limiting the availability of her product) in response to the availability of a complement. Since this potential for opportunistic behavior discourages output of the complement, leasing can also be problematic. As a result, the durable goods manufacturer faces a trade-off between leasing, which commits her to not over-produce, and selling, which commits her to not under-produce. Our contribution is to identify this trade-off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market.

Keywords: Complementary markets, selling versus leasing, leasing with an option-to-buy

Suggested Citation

Bhaskaran, Sreekumar R. and Gilbert, Stephen, Selling and Leasing Strategies for Durable Goods with Complementary Products (April 1, 2005). Management Science, August 2005; McCombs Research Paper Series No. IROM-07-05. Available at SSRN: https://ssrn.com/abstract=788625

Sreekumar R. Bhaskaran

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM) ( email )

Dallas, TX 75275
United States

Stephen Gilbert (Contact Author)

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
524
rank
48,583
Abstract Views
2,920
PlumX