Sale or Lease? Durable-Goods Monopoly with Network Effects

Abstract

This paper studies the pricing problem of a durable-goods monopolist. It finds that contrary to the existing literature, profits from selling durable goods might be higher than from leasing when the products exhibit network effects. Under the influence of network effects, there exist multiple self-fulfilling equilibria that would sustain different network sizes at the same price. By using the assumption that consumers are cautious about network growth, we find that consumption externalities among heterogeneous groups of consumers generate a discontinuous demand function, which requires a lessor to offer a low price if she wants to reach the mass market. In contrast, a seller enjoys a relative advantage in that she can build a customer base by setting a lower initial price and raise the price later in the mass market. Our finding that selling can be more profitable than leasing holds when consumers are more cautious about the prospect of the product's success, which might be the case if, for example, the technology or manufacturer is relatively unknown.