While the question of whether a firm should lease or sell its product has been well studied, little is known about the optimal strategies in the presence of costly disposal fees incurred by environmental legislation. When a durable goods firm leases, it has to decide how many of the off-lease products should be marketed to customers as used products as the rest have to be disposed at a cost (or salvaged to recover value). When a firm sells the product, it recovers products due to the trade-in rebates and buybacks it offers to consumers who already own a product and has to make a similar decision. We characterize the optimal recovery, disposition and marketing strategy for a monopolist firm to find conditions when a firm should market all or none of the off-lease products (for leasing) and when a firm should recover and market all, a fraction or none of the existing units (for selling). We also show that leasing is not always profitable and the optimal strategy depends on market and consumer characteristics. In addition, there have been anecdotal claims that leasing is more environmentally beneficial than selling as the firm gains ownership of the offlease product and will choose a better recovery and re-marketing strategy. We analytically investigate this claim by comparing the total environmental impact throughout the entire life cycle of the product (i.e. in production, use and disposal phases of the product) under both strategies. We find that if it is optimal to sell, the environmental impact is not always higher than that under leasing. On the other hand, if it is optimal to lease, we find that the environmental impact is always lower than or equal to that under selling.
(Joint research with Vishal Agrawal, Valerie Thomas and L. Beril Toktay of Georgia Institute of Technology)
Ferguson-4avril08.pdf (100 KB)