Pricing for sales and per-use rental services with vertical differentiation

Yugang Yu, Yuxuan Dong and Xiaolong Guo

European Journal of Operational Research, 2018, vol. 270, issue 2, 586-598

Abstract: An increasing number of firms are simultaneously offering consumers products for sale and for per-use rental services. Typically, the products offered in per-use rental services are different from those offered for sale. For example, automobiles offered in Daimler’s Car2Go program are “Smart” cars, which have a smaller size than the typical automobiles sold to consumers. Such a difference, which is objectively measurable and captured by quality, is called a vertical differentiation. This study investigates the optimal pricing problem for per-use rental services and sales, and reveals how per-use rental services interplay with sales when vertical differentiation exists. The optimal solution is unique and determined by a model that uses a marginal renter and a marginal buyer as decision variables rather than the prices of per-use rental services and sales. The vertical differentiation significantly influences a firm’s potential profitability. When the vertical differentiation falls into a certain interval, the potential profitability from per-use rental services is higher than that from sales, which explains why the per-use rental business model is increasing in popularity. Finally, the results show that offering products with a relatively high (low) quality in per-use rental services (sales) is highly profitable for product categories with a strong pooling effect or when there are high firm-side benefits from ownership. This finding enriches the existing literature by providing novel perspectives on ownership and the pooling effect, and these insights are illustrated through a numerical example.

Keywords: OR in marketing; Pricing; Per-use rental services; Vertical differentiation; Ownership (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:270:y:2018:i:2:p:586-598

DOI: 10.1016/j.ejor.2018.03.035

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