Distribution Strategies for Durable Goods with Indirect Network Effects

In this paper we examine the influence that indirect network effects have on a durable goods manufacturer’s distribution strategy to lease or sell her product. Previous research has identified that a durable goods manufacturer can mitigate the potential for its own opportunistic behavior with respect to consumers by leasing instead of selling its product. However, we show that leasing creates an opportunity for a durable goods manufacturer to exploit firms that generate indirect network benefits by providing complementary products. As a result, the durable goods manufacturer faces a trade-off between leasing, which mitigates its potential to exploit consumers, and selling, which mitigates its potential to exploit producers of complementary products. In this paper, we examine this trade-off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market. We also analyze the impact of leasing with an optionto-buy contracts under these situations. (complementary markets, selling versus leasing, leasing with an option-to-buy) ∗The authors are listed in alphabetical order †University of Texas at Austin, Management Department CBA 4.202, Austin, Tx-78712, [email protected] ‡University of Texas at Austin, Management Department CBA 4.202, Austin, Tx-78712, [email protected]