The comparison between trade-in and leasing of a product with technology innovations |
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| Institution: | 1. Department of Information Systems and Operations Management, Sawyer Business School, Suffolk University, Boston, MA 02108, USA;2. Department of Supply Chain and Information Systems, Smeal College of Business, The Pennsylvania State University, University Park, PA 16802, USA;1. Department of Economics and Finance, University of Guelph, Guelph, Ontario, Canada;2. Department of Economics, Ipek University, Ankara, Turkey;3. Department of Operations Management, ESSEC Business School, Paris, France;1. Jiangsu Provincial Key Laboratory of E-Business, Nanjing University of Finance and Economics, Nanjing, Jiangsu, China;2. School of Information Technology, Jiangxi University of Finance and Economics, China;3. Faculty of Business, Lingnan University, Hong Kong;1. School of Economics and Management, Southwest Jiaotong University, Chengdu 610031, PR China;2. Department of Business Administration, National Taiwan University, No. 1, Sec. 4, Roosevelt Road, Taipei 10617, Taiwan, ROC |
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| Abstract: | Companies can adopt trade-in and/or leasing to shorten consumers? upgrade cycle and gain control over secondary markets. In this paper, we consider a monopolistic manufacturer who offers a technology product to a market consisting of heterogeneous consumers. We focus on an exogenous, stochastic innovation process that determines the availability of new technology and consequently, residual value of the current product. We derive the optimal pricing strategy of trade-in and leasing, respectively, examine its impact on the manufacturer?s expected profit, and compare the performance of the two strategies. Trade-in protects the manufacturer against residual value risk and allows the flexibility of offering the option at different innovation states separately. Leasing, on the other hand, provides the manufacturer an opportunity to circumvent low new product prices and thus increases expected profit when product reuse profitability is high. The interplay between the two forces, product reuse profitability and new product price, determines the preference between trade-in and leasing. Our findings provide monopolistic manufacturers guidance on how to optimally employ the trade-in and leasing strategies. |
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| Keywords: | Trade-in Leasing Durable goods Product reuse Stationary equilibrium |
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