Pricing Joint Sales and Rentals: When are Purchase-Conversion Discounts Optimal?

Abstract

Product sales and rentals often occur in parallel, allowing customers to choose their preferred option. In settings where consumers face significant valuation uncertainty, rentals also provide a mechanism for consumers to discover whether they like a product. For some products, such as movies and books, the rental option may yield a significant proportion of the utility associated with ownership. The convenience of renting products in digital forms (e.g., e-books) makes the managerial challenge of jointly pricing rentals and sales increasingly relevant. Rental and sales prices are interdependent not only because consumers can choose between the two options, but also because a customer may rent before purchasing. Given these considerations and allowing for consumer uncertainty, we analyze the optimal joint pricing of product rentals and sales. We show that when consumers have a relatively high probability of liking a product and will experience a significant drop in their post-rental residual utility, then the practice of allowing a portion of the rental price to apply to a future purchase is optimal.