Leasing and selling: optimal marketing strategies for a durable goods firm

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Leasing and selling: optimal marketing strategies for a durable goods firm

Desai, P. / Purohit, D.

This paper analyzes the problems associated with marketing a durable through leases and sales. Academic research in this area has argued that in a monopolistic environment, leasing dominates selling. Hence, leasing and selling should not co-exist and the firm should concentrate its efforts solely on leasing. It is shown that the relative profitability of leasing and selling hinges on the rates at which leased and sold units depreciate. In particular, it is found that leasing does not dominate selling in all cases; if sold units depreciate at a significantly higher rate than leased units, a monopolistic firm is better off by only selling its product. In addition, it is found that if leaded and sold products depreciate at different rates, then the optimal strategy for the firm involves a combination of both leasing and selling. The paper is concluded with an empirical analysis of the depreciation rates of leased and sold units of a popular car model. It is found that the depreciation rate of leased cars has been significantly lower than the depreciation rate of sold cars.