The comparison between trade-in and leasing of a product with technology innovations

Companies can adopt trade-in and/or leasing to shorten consumers' upgrade cycle and gain control over secondary markets. In this paper, we consider a monopolistic manufacturer who offers a technology product to a market consisting of heterogeneous consumers. We focus on an exogenous, stochastic innovation process that determines the availability of new technology and consequently, residual value of the current product We derive the optimal pricing strategy of trade-in and leasing, respectively, examine its impact on the manufacturer's expected profit, and compare the performance of the two strategies. Trade-in protects the manufacturer against residual value risk and allows the flexibility of offering the option at different innovation states separately. Leasing, on the other hand, provides the manufacturer an opportunity to circumvent low new product prices and thus increases expected profit when product reuse profitability is high. The interplay between the two forces, product reuse profitability and new product price, determines the preference between trade-in and leasing. Our findings provide monopolistic manufacturers guidance on how to optimally employ the trade-in and leasing strategies. (C) 2015 Elsevier Ltd. All rights reserved.