The Options View of Products: Flexibility, Modularity, and Systemic Effects

This paper aims to lay a theoretical foundation on how individuals value durable products. In this paper we emphasize ownership and analyze why customers want to own products and the value they give to ownership. Specifically, we argue that the ownership of a product represents a bundle of options. At any given point in time, the owner of a product has the option to choose whether she wants to use the product or not. In addition, this paper extends the current literature on product value by taking explicitly into account several important characteristics of modern products, namely modularity, and systemic as well as network effects. This approach has the significant benefit that it allows consideration of uncertainty about the future use of the product. The model shows that the value of a product is sensitive to the changes in uncertainty, especially when the variable costs are high compared to the utility. This uncertainty about future utility depends on the uncertainty about future needs and wants, about the quality of the product, and about the availability and quality of future upgrades. However, the value is also dependent on the uncertainty about the future variable costs.