Leasing, Modularity, and the Circular Economy

Abstract

We investigate the economic and environmental implications of jointly implementing leasing and modularity, two prominent circular economy strategies, and their interaction. We develop a durable goods model to obtain insights for firms considering the use of these strategies. We first analyze the effect of adopting leasing on a firm’s product architecture choice. We find that a modular product architecture is more attractive under leasing only if off-lease products depreciate to a greater extent. We next analyze the effect of adopting a modular product architecture on the firm’s business model choice. We find that adopting a modular architecture can cause a leasing firm to switch to selling but will not lead a selling firm to switch to leasing. Building on these results, we show that leasing a modular product is preferred by the firm only under limited conditions (i.e., when production costs are low, off-lease products are in relatively better condition, and when there is a large difference between depreciation levels of different modules). Finally, we show that jointly implementing leasing and modularity can also lead to higher environmental impact than only adopting leasing or modularity in isolation. This paper was accepted by Vishal Gaur, operations management.