Skip to main content
SpringerLink
Log in

Strategic decisions of sales and pay-per-use rentals under incomplete product availability

  • Published:
Journal of Global Optimization Aims and scope Submit manuscript

Abstract

Motivated by the fact that pay-per-use rentals require firms to be responsible for the the operational costs of products and service support network, we establish a pay-per-use rental model where a firm strategically sets the availability of products for rentals to achieve the trade-off between production quantity and operational costs. Furthermore, based on the traditional sale model, we also propose a combined model of sale and pay-per-use rental. The objective is to maximize firm’s profits under three models: the sale model, the pay-per-use rental model, and the hybrid model of sale and rental. The approach of backward induction is adopted to obtain the firm’s optimal decisions on pricing and production volume. Through comparative analysis, we provide the firm’s global optimal strategic solution, and the corresponding solutions in different market environments are developed, respectively, due to the variance of polling effects and costs. The results show that under the no-pooling case where customers’ requests overlap completely, the hybrid model always show higher profitability than the pay-per-use rental model, and it performs better than the sales model only when the per-unit operational and production costs are low. Under the perfect-pooling case where customers’ requests do not overlap, the hybrid model is always the optimal strategy. Numerical experiments are also conducted to illustrate the results under the general pooling case.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Similar content being viewed by others

References

  1. Aercap: Aercap is the global leader in aircraft leasing. Available at https://www.aercap.com// (last accessed: December 19, 2019) (2019)

  2. Agrawal, V.V., Bellos, I.: The potential of servicing as a green business model. Manag. Sci. 63(5), 1545–1562 (2016)

    Article  Google Scholar 

  3. Baghalian, A., Rezapour, S., Farahani, R.Z.: Robust supply chain network design with service level against disruptions and demand uncertainties: a real-life case. Eur. J. Oper. Res. 227(1), 199–215 (2013)

    Article  MathSciNet  MATH  Google Scholar 

  4. Baines, T., Lightfoot, H., Peppard, J., Johnson, M., Tiwari, A., Shehab, E., Swink, M.: Towards an operations strategy for product-centric servitization. Int. J. Oper. Prod. Manag. 29(5), 494–519 (2009)

    Article  Google Scholar 

  5. Bajwa, N., Fontem, B., Sox, C.R.: Optimal product pricing and lot sizing decisions for multiple products with nonlinear demands. J. Manag. Anal. 3(1), 43–58 (2016)

    Google Scholar 

  6. Balasubramanian, S., Bhattacharya, S., Krishnan, V.V.: Pricing information goods: a strategic analysis of the selling and pay-per-use mechanisms. Mark. Sci. 34(2), 218–234 (2015)

    Article  Google Scholar 

  7. Bellos, I., Ferguson, M., Toktay, L.B.: The car sharing economy: interaction of business model choice and product line design. Manuf. Serv. Oper. Manag. 19(2), 185–201 (2017)

    Article  Google Scholar 

  8. Conlon, C.T., Mortimer, J.H.: Demand estimation under incomplete product availability. Am. Econ. J.: Microecon. 5(4), 1–30 (2013)

    Google Scholar 

  9. Das, K.: Integrating effective flexibility measures into a strategic supply chain planning model. Eur. J. Oper. Res. 211(1), 170–183 (2011)

    Article  MATH  Google Scholar 

  10. Demirhan, D., Jacob, V.S., Raghunathan, S.: Strategic IT investments: the impact of switching cost and declining IT cost. Manag. Sci. 53(2), 208–226 (2007)

    Article  Google Scholar 

  11. Dhebar, A.: Bringing new high-technology products to market: six perils awaiting marketers. Bus. Horiz. 59(6), 713–722 (2016)

    Article  Google Scholar 

  12. Gaiardelli, P., Resta, B., Martinez, V., Pinto, R., Albores, P.: A classification model for product–service offerings. J. Clean. Prod. 66, 507–519 (2014)

    Article  Google Scholar 

  13. Geng, X., Tan, Y., Wei, L.: How add-on pricing interacts with distribution contracts. Prod. Oper. Manag. 27(4), 605–623 (2018)

    Article  Google Scholar 

  14. George, D.K., Xia, C.H.: Fleet-sizing and service availability for a vehicle rental system via closed queueing networks. Eur. J. Oper. Res. 211(1), 198–207 (2011)

    Article  MathSciNet  MATH  Google Scholar 

  15. Gilbert, S.M., Randhawa, R.S., Sun, H.: Optimal per-use rentals and sales of durable products and their distinct roles in price discrimination. Prod. Oper. Manag. 23(3), 393–404 (2014)

    Article  Google Scholar 

  16. Gurnani, H., Karlapalem, K.: Optimal pricing strategies for internet-based software dissemination. J. Oper. Res. Soc. 52(1), 64–70 (2001)

    Article  MATH  Google Scholar 

  17. Haddad, G., Sandborn, P., Jazouli, T., Pecht, M., Foucher, B., Rouet, V.: Guaranteeing high availability of wind turbines. In: Proceedings of the European Safety and Reliability Conference, vol. 18–22 (2011)

  18. Hall, J., Porteus, E.: Customer service competition in capacitated systems. Manuf. Serv. Oper. Manag. 2(2), 144–165 (2000)

    Article  Google Scholar 

  19. Hawkins, A.J.: GM car-sharing service is pulling out of eight cities, including Chicago and NYC. Available at https://www.theverge.com/2019/5/20/18633109/gm-maven-car-sharing-operations-cities-ending-chicago-new-york (last accessed: December 19, 2019) (2019)

  20. Herrmann, A., Huber, F., Braunstein, C.: Market-driven product and service design: bridging the gap between customer needs, quality management, and customer satisfaction. Int. J. Prod. Econ. 66(1), 77–96 (2000)

    Article  Google Scholar 

  21. Jiang, B., Chen, P.y., Mukhopadhyay, T.: Software licensing: Pay-per-use versus perpetual. Working paper, Tepper School of Business, Carnegie Mellon University, Pittsburgh (2007)

  22. Li, M.: Overconfident distribution channels. Prod. Oper. Manag. 28(6), 1347–1365 (2019)

    Article  Google Scholar 

  23. Meng, Q., Wang, S.: Liner shipping service network design with empty container repositioning. Transp. Res. E: Logist. Transp. Rev. 47(5), 695–708 (2011)

    Article  Google Scholar 

  24. Pakusch, C., Bossauer, P., Shakoor, M., Stevens, G.: Using, sharing, and owning smart cars. In: Proceedings of the 13th International Joint Conference on e-Business and Telecommunications, pp. 26–28 (2016)

  25. Peng, Z.: Daimler launches car-sharing service in China. Available at http://english.cri.cn/12394/2016/04/16/3441s924388.htm/ (last accessed: December 19, 2019) (2016)

  26. Phumbua, S., Tjahjono, B.: Towards product-service systems modelling: a quest for dynamic behaviour and model parameters. Int. J. Prod. Res. 50(2), 425–442 (2012)

    Article  Google Scholar 

  27. Postmus, D., Wijngaard, J., Wortmann, H.: An economic model to compare the profitability of pay-per-use and fixed-fee licensing. Inf. Softw. Technol. 51(3), 581–588 (2009)

    Article  Google Scholar 

  28. Tan, Y., Carrillo, J.E.: Strategic analysis of the agency model for digital goods. Prod. Oper. Manag. 26(4), 724–741 (2017)

    Article  Google Scholar 

  29. Tan, Y., Carrillo, J.E., Cheng, H.K.: The agency model for digital goods. Decis. Sci. 47(4), 628–660 (2016)

    Article  Google Scholar 

  30. Yang, S., Wang, J., Shi, L., Tan, Y., Qiao, F.: Engineering management for high-end equipment intelligent manufacturing. Front. Eng. Manag. 5(4), 420–450 (2018)

    Article  Google Scholar 

  31. Yu, Y., Dong, Y., Guo, X.: Pricing for sales and per-use rental services with vertical differentiation. Eur. J. Oper. Res. 270(2), 586–598 (2018)

    Article  MathSciNet  MATH  Google Scholar 

Download references

Acknowledgements

This work was supported by the National Natural Science Foundation of China (Nos. 71922009, 71871080, 71601065, 71690235, 71531008), and Innovative Research Groups of the National Natural Science Foundation of China (71521001), the Humanities and Social Sciences Foundation of the Chinese Ministry of Education (No. 15YJC630097), and Base of Introducing Talents of Discipline to Universities for Optimization and Decision-making in the Manufacturing Process of Complex Product (111 project).

Author information

Authors and Affiliations

  1. School of Management, Hefei University of Technology, Hefei, China

    Ping Yan & Jun Pei

  2. Key Laboratory of Process Optimization and Intelligent Decision-Making of Ministry of Education, Hefei, China

    Jun Pei

  3. Business School, The National University of Mongolia, Ulaanbaatar, Mongolia

    Altannar Chinchuluun

Authors
  1. Ping Yan
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Jun Pei
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Altannar Chinchuluun
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jun Pei.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Yan, P., Pei, J. & Chinchuluun, A. Strategic decisions of sales and pay-per-use rentals under incomplete product availability. J Glob Optim 78, 671–691 (2020). https://doi.org/10.1007/s10898-019-00872-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10898-019-00872-0

Keywords

Search

Navigation