Installed base management versus selling in monopolistic and competitive environments

This paper compares the policy of selling a product to that of installed base management, in which the manufacturer leases the product to consumers, and bundles repair and maintenance services along with the product. We compare the two policies in a monopolistic setting when a firm uses either one of the policies, and when both policies are used by a single firm. We then compare the policies under competition first when two firms use identical products, and when two firms use vertically differentiated products. Our findings indicate that the selling option dominates the installed base option in a monopolistic environment, even for significant values of remanufacturing savings from the installed base policy. In a competitive environment, if two firms use identical products, we find that the two firms use only differentiated pure strategies (where one firm uses installed base management and the other uses selling), or the outcome is a mixed equilibrium, where each firm uses each pure strategy with a certain probability. We find that the firm using the installed base management policy in the duopoly with identical products performs better than the firm using the selling policy. In a competitive market where both firms use vertically differentiated products, we find that both firms can use both mechanisms of installed base management and selling in equilibrium. However, we find that the profits from the installed base segments of the two firms are higher than the profits from the selling segments. Our results indicate that the selling policy performs better in a monopolistic environment while the installed base policy performs better in a competitive environment.