Strategic decisions of sales and pay-per-use rentals under incomplete product availability

Abstract

Motivated by the fact that pay-per-use rentals require firms to be responsible for the the operational costs of products and service support network, we establish a pay-per-use rental model where a firm strategically sets the availability of products for rentals to achieve the trade-off between production quantity and operational costs. Furthermore, based on the traditional sale model, we also propose a combined model of sale and pay-per-use rental. The objective is to maximize firm’s profits under three models: the sale model, the pay-per-use rental model, and the hybrid model of sale and rental. The approach of backward induction is adopted to obtain the firm’s optimal decisions on pricing and production volume. Through comparative analysis, we provide the firm’s global optimal strategic solution, and the corresponding solutions in different market environments are developed, respectively, due to the variance of polling effects and costs. The results show that under the no-pooling case where customers’ requests overlap completely, the hybrid model always show higher profitability than the pay-per-use rental model, and it performs better than the sales model only when the per-unit operational and production costs are low. Under the perfect-pooling case where customers’ requests do not overlap, the hybrid model is always the optimal strategy. Numerical experiments are also conducted to illustrate the results under the general pooling case.