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

This paper analyzes the problems associated with marketing a durable throug h leases and sales. Academic research in this area has argued that in a mon opolistic environment, leasing dominates selling. Hence, leasing and sellin g should not co-exist and the firm should concentrate its efforts solely on leasing. We show that the relative profitability of leasing and selling hi nges on the rates at which leased and sold units depreciate. In particular, we find that leasing does not dominate selling in all cases; if sold units depreciate at a significantly higher rate than leased units, a monopolisti c firm is better off by only selling its product. In addition, we find that if leaded and sold products depreciate at different rates, then the optima l strategy for the firm involves a combination of both leasing and selling. We conclude the paper with an empirical analysis of the depreciation rates of leased and sold units of a popular car model. We find that the deprecia tion rate of leased cars has been significantly lower than the depreciation rate of sold cars.