Abstract
Leasing has been increasingly seen as a viable alternative to traditional business models. In this paper, we consider a manufacturer making decisions on green product design by accounting for the trade-off between traditional and environmental qualities under three business models, including a pure selling, a pure leasing, and a hybrid model with both selling and leasing. Under leasing, there exists the pooling effect that allows a manufacturer to meet consumer needs with fewer products. Since the pooling effect decreases the marginal cost of production, leasing produces positive incentives to increase product quality. However, the cannibalization effect within the product line distorts the incentives so that the pooling effect only increases the traditional quality rather than the environmental quality. As a result, leasing may have a negative impact on the average environmental quality of products. The manufacturer should make business model choices depending on some factors, including the types of markets, the usage cost, and the pooling effect. In general, when the pooling effect is strong, the manufacturer prefers a leasing or hybrid model to selling but designs products with lower environmental quality than selling. When the pooling effect is weak, the optimal decision should be made depending on the types of markets and the usage cost: in the high-end (low-end) market, the manufacturer should adopt a leasing or hybrid model only when the usage cost is high (low); the adoption of leasing or hybrid model can improve the average environmental quality.
Highlights
More manufacturers are shifting their business models from selling to leasing as an approach to enhance their profitability
We extend the classic green product design framework, which is developed by Chen [18], to the field of leasing. e second contribution is managerial. (i) Leasing may not improve the average environmental quality of products. e intuition is that the pooling effect decreases the marginal cost by reducing the number of products, encouraging the manufacturer to improve the quality
We investigate the mechanism by which leasing affects green product design and analyze the economic and environmental consequences of leasing
Summary
More manufacturers are shifting their business models from selling to leasing as an approach to enhance their profitability. Bellos et al [1] take the two effects above into account, they only study leasing in the context of car sharing and ignore the impact of green consumers on product design. Chen [18] develops a framework to analyze green product design, which considers the trade-off between traditional and environmental qualities. Zhu and He [29] and Xu et al [30] analyze green product design under competition In this stream of research, our paper is most related to Chen [18], Su et al [19], and Zhang et al [20], but they do not consider leasing. The cannibalization effect distorts the incentives, resulting in a decrease in the environmental quality. (ii) Leasing may improve both profitability and environmental quality, which depends on the usage cost, the pooling effect, and the types of markets
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