is Leasing Greener Than Selling_Agarwal

Is Leasing Greener than Selling?

Vishal Agrawal ,Mark Ferguson

Valerie Thomas, Beril Toktay

Management Science 2012

Kishore Kumar

Gangwani

How to improve environmental performance ?

• Make firms responsible for their

products post use.

• Hence, firms will remarket their

recovered products or make goods

more durable ( White etal 1999,

Mont 2002)

• Hence, Demand for new products

decreases, raw material demand

decreases, reduced environmental

impact.

• Hence environmental groups

advocate leasing or take back

options over selling.

Reduce use of raw materials

Reuse the existing

products

Recycle

Examples of Firms using leasing Interface Inc. Evergreen Lease: “Leasing carpet rather than selling it” Xerox, IBM, HP Advocacy by U.S.EPA,NYC Government , Minnesota pollution control Agency

Arguments against Leasing

• Premature disposal due to cannibalization concerns. • What about environmental impact due to the

production and use phases? • Environmental superiority of leasing is not clear yet.

Related Literature

• Durable Goods: Focuses only on profitability of leasing and selling.

Coase (1972), Stokey (1981), Waldman (1997), Desai & Purohit (1998,1999), Huang et. al (2001), Bhaskaran and Gilbert (2005,2009).

• Closed-Loop Supply Chains: Focuses only on selling.

Majumder and Groenevelt (2001), Debo et al. (2005), Ferrer and Swaminathan (2006), Guide et. al (2006) ,Ferguson and Toktay (2006), Atasu et al. (2008), Guide and van Wassenhove (2009).

• Industrial Ecology: Only focuses on the environmental performance of a single unit.

Hawken et al. (1999), Lifset & Lindhqvist (2000), Fishbein et al. (2000)

The Model • Compare a pure leasing strategy with a pure selling strategy.

• Product has a useful life time of two periods.

• Discrete-time, Infinite Horizon, Dynamic game.

• Under leasing, operating lease of one period duration.

• Under selling, there is an independent secondary market.

• Cost of producing a new product is c.

• Remarketing and Transaction costs are normalized to zero.

• Disposal costs are sf and sc . These two costs are not equal.

Leasing and Selling

Consumers

End-of-life products

Used products

Used product leases

New product leases

Consumers New Product sales

Secondary Market

Leasing firm

Selling firm

Disposal

pays

Disposal

pays

The Consumer Model • Forward-looking and Heterogeneous consumers.

• Consumer type denoted by θ which belongs to [0,1]

• Per-period Gross Utility

u(θ,i)=(un (θ), uui(θ),0) where i ε {l,s}

• Consumer prefers new to old and old to being inactive, hence un (θ)>= uu

i(θ)>=0

• un (θ)= θ

• uul(θ)= δlθ

• uus(θ)= δsθ

• Where, δl, δs ε (0,1). It is the product durability and is interpreted as the relative willingness to pay for the old product compared to new product . Two values of delta will be different depending on the fact that product was leased or sold.

Analysis of leasing strategy

• Customer θ’s period t action vector is :

alt(θ)=[ln

t(θ), lut(θ),it(θ)]

• Vector of lease prices at time t is:

Rt=[rnt,ru

t]

• Quantity leased by firm in period t is :

Lt=[Lnt,Lu

t]

• Consumer enters each period without a product and periods are decoupled.

0 1 Θ1 Θ2

Analysis of leasing strategy…

• Solving for steady state equilibrium gives :

rnt = 1- Ln

t-δLut

rut = δl(1- Ln

t-δLut )

• Firms problem is to maximize:

(rnt –c) Ln

t + (rut –0) Lu

t - sfLut-1 – sf(Ln

t-1-Lut)

Analysis of Selling Strategy • In selling strategy, product is lasting for 2 periods. Consumer’s payoff in a given

period depends on his action in previous period and prices in current period. Hence the Markovian Dynamics.

• Out of these 9 strategies only six are relevant for consideration, because permutations of same pattern are not distinct (NU, NN, NI, UU, UI, II)

• UI is ruled out at focal point because a rational consumer at U or I, will choose same action in current period because product lasts for 2 periods.

• NI is also not possible.

• So only 4 are left (NN, NU, UU, II)

• Consumers who play NN have higher theta than those who play NU, who have higher theta than those who play UU. II have the least willingness to pay.

Analysis of Selling Strategy

• Consumer wants to maximize discounted net utility:

• Consumers time independent Bellman equation is :

• Different consumer segments will act like following:

θ3 θ1 θ2 Θ=1 0 II UU NU/UN NN

Analysis of Selling Strategy

Reduced Maximization problem is:

Solution to this problem is :

Environmental impact of a product

• Environmental impact is defined as volume of products in each phase multiplied by per unit impact of the product in each phase.

Per unit production phase impact: ip

Per unit use phase impact : iu

Per unit disposal phase impact: id

• Hence environmental impact in leasing is :

El=(ip+id)Ln*+iu1Ln*+iu2*Lu*

• Hence environmental impact in selling is :

ES=(ip+id)Sn*+iu1Sn*+iu2Sn*

Is leasing profitable and greener?

Whether leasing is more profitable or greener strategy depends upon:

1. Product Durability

2. Use impact

Results

N. A. Leasing is Win-Win only if remanufacturing or refurbishing before remarketing. .

More profitable but worse for the environment (laptops, carpets).

Win-Win (printers, photocopiers)

Low use impact High use impact

High

Durability

Low

Durability

Results

• Leasing may be less green than selling despite full remarketing

• Leasing may be greener than selling despite partial remarketing.

• Higher durability can lead to leasing being environmentally worse.

• Hence neither remarketing level nor the durability level is a good proxy for environmental impact.

• Leasing is not always greener than selling and depends on the product type.

Possible extensions

• Differential per-unit impact.

Use impact of an old product may be higher than a new product.

Disposal by the consumer may be worse for the environment than disposal by the firm.

• Moral hazard or Remanufacturing under Leasing.

Value of off-lease products may be lower due to rougher use.

Remanufacturing may improve the value of off-lease products.

Thank You