Selling and Leasing Strategies for Durable Goods with Complementary Products

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