Modeling The Economics of Differentiated Durable-Goods Markets

© Due to the time constraint, the paper was completed in a rush and thus some of the economic interpretation may not be completely accurate. Abstract Leasing has traditionally been one of the tools that firm employs to increase market share. It is not intuitive that this strategy would actually be beneficial. It is certainly not true if we consider only perishable goods. However, there are goods in the market that does not perish the instant we consume it or durable goods. Having leasing option in durable goods creates another market for used goods as a residue when the lease term ends. In the past, we have seen companies implementing this policy exclusively even abandoning their selling option. Here we are only considering the case where firms never sells their new goods due to the high transaction cost incurred. Durable goods is interesting on its own accord since we are faced with a dynamic problem in which each period depends on the previous periods action since we might still have an option to reuse the product we purchased from the previous periods. Thus the decision process for the market participants are intrinsically dynamic. Transaction costs in selling used goods prompt consumers to think ahead in order to avoid adverse lock-ins, and hence have a strong influence on the endogenous formation of these patterns. Likewise, producers have to choose their production/pricing strategies so that the demands on new and used goods are balanced, and the percentages of sold and leased new goods are properly allocated. We consider exogenuous products with vertical differentiation. There exist a continuum of consumer types. Producers have an option to concurrently sell and lease new goods with the possibility of incurring a transaction costs. Once consumers select their consumption pattern, they will continue to follow it ad infinitum. Thus the equilibrium aggregate market shares are essentially static, product differentiation in durable-goods market becomes almost the same as that in search-goods markets with only minor modifications. The resulting pricing game practically becomes a mechanism design problem with one agent and either one or two principals in monopoly and duopoly settings respectively. Leasing in our model turns out to be a tool to facilitate price discrimination. Following previous study done by Huang, Kuzyutin (2002) on the utilization of concurrent selling and leasing for competition, we consider further in this paper what will happen if the action space of the …