1824. Traditional Sales versus Subscription Rentals in Retail: Business Model Choice, Price and Assortment Competition
Invited abstract in session WD-47: Game Theory in Retail II, stream Retail Operations.
Wednesday, 14:30-16:00Room: Parkinson B08
Authors (first author is the speaker)
| 1. | Oben Ceryan
|
| Bayes Business School, City, University of London | |
| 2. | Aditya Jain
|
| Baruch College, City University of New York | |
| 3. | Tolga Aydinliyim
|
| Baruch College, City University of New York | |
| 4. | Mehmet Altug
|
| George Mason University |
Abstract
Motivated by the emergence of rental business models that cater to variety-seeking customers through subscription services, we examine the economics of the “subscription rental business model” in contrast to the traditional “seller business model.” We formulate the utility function of variety-seeking customers based on Salop’s (1979) circular model of spatial competition and use it to determine demand functions for each business type as a function of price and assortment size. First, we consider a monopolist firm’s choice between the two models and show that the rental business model optimally chooses a higher assortment. Consequently, this business model prevails only when assortment and transaction costs are small. We then analyze competition between a rental firm and a seller firm. Our analysis shows that when assortment costs are moderate, both firms can coexist without competing on price. In these cases, the equilibrium is characterized by the rental firm choosing a larger assortment and the seller firm contracting its assortment.
Keywords
- Game Theory
- Revenue Management and Pricing
- Supply Chain Management
Status: accepted
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