Selling and Leasing Strategies for Durable Goods with Complementary Products

Abstract

It has been recognized that when a durable goods manufacturer sells its output, it has an incentive to produce at a rate that will drive down the market price of the 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 the manufacturer instead leases the product, it can eliminate its own incentive to decrease the price over time, which allows it 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 that leases its product has an incentive to increase prices (by limiting the availability of the product) in response to the availability of a complement. Because 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 the manufacturer to not overproduce, and selling, which commits it to not underproduce. 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.

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