Srabana Dasgupta, S. Siddarth, and Jorge Silva-Risso
Executive Summary
The authors develop a structural model of a consumer's choice of vehicle and the related decision of whether to lease or to buy it. Leasing and financing contracts of a vehicle are treated as differentiated products, each with their own unique acquisition costs. Three types of acquisition costs are identified: (1) the net price or financial cost of the vehicle, (2) its maintenance costs, and (3) its cost of operation. The model is estimated on a data set of new car purchases from the entry-luxury segment of the U.S. automobile market.
Several key insights emerge from this study. First, the rate at which consumers discount future payments is estimated to be higher than the prevailing market rate. This implies that consumers are myopic, preferring contracts with lower payment streams, even when they have higher total costs. Second, the estimate of how much consumers drive annually shows that despite lower monthly payments, for many consumers, leasing can be a costly alternative because of the per-mile penalty such contracts impose. Third, the authors find that cars that have higher maintenance costs are more likely to be leased than bought. Thus, although the lower monthly payments afforded by leases can explain why cars belonging to higher price ranges are leased more, this study provides a novel answer to why lease shares vary across vehicles that are within the same price range and have comparable lease payments.
Finally, the effect of a promotion is quantified in three ways: (1) the total incremental volume it generates, (2) the extent to which the incremental volume cannibalizes the promoted vehicle's existing contracts and, and (3) its overall profitability. The authors show how this decomposition can be used to provide managerial insights into the relative effectiveness of commonly used promotional instruments, such as cash rebates, interest rate subsidies, and residual value reductions.
Biography
Srabana Dasgupta is an assistant professor in the Marketing Division at the Sauder School of Business, University of British Columbia, Vancouver. She holds a master's degree in Economics from the Delhi School of Economics and received a Ph.D in marketing from the University of Southern California in 2004. Her research interests include durable goods, pricing strategy, and models of information asymmetry.
S. Siddarth is Associate Professor of Marketing in the Marshall School of Business at the University of Southern California, Los Angeles. He holds a BTech from the Indian Institute of Technology, Delhi, a PGDM from the Indian Institute of Management, Calcutta, and a PhD in marketing from the Anderson School of Management at the University of California, Los Angeles. His research interests lie in the development and use of response models to understand consumer and market behavior. His research has been published in Journal of Marketing Research, Journal of Marketing, Journal of Forecasting, Marketing Science, and Psychology and Marketing.
Jorge Silva-Risso is Assistant Professor of Marketing in the A. Gary Anderson Graduate School of Management at the University of California, Riverside, which he joined after more than seven years as the executive director of marketing science at J.D. Power and Associates. He holds a PhD in Management (1996) and an MBA (1991) from the University of California, Los Angeles. His research interests include econometric models of consumer response, marketing productivity, and the effects of the Internet on consumer behavior. His work has been published in American Economic Review, Journal of Marketing Research, Marketing Science, Journal of Econometrics, Journal of Industrial Economics, Journal of Marketing, Quantitative Marketing and Economics, and Journal of Product and Brand Management. His doctoral dissertation received the Alden G. Clayton Award from the Marketing Science Institute. Silva-Risso's "Incentive Planning System: A DSS for Planning Pricing and Promotions in the Automobile Industry" won the 2006 Marketing Science Practice Prize awarded from the Institute for Operations Research and the Management Sciences (INFORMS) for outstanding implementation of marketing science concepts and methods. He has served in multiple capacities in the board of the INFORMS Society for Marketing Science (ISMS). Currently, he is the ISMS vice president of practice.
Journal of Marketing Research, Vol. XLIV, No. 3, August 2007
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