Monday, July 18, 2011

Lifecycle Pricing for Installed Base Management with Constrained Capacity and Remanufacturing
INSEAD Working paper 2011/83/TOM/ISIC

Installed base management is the policy in which the manufacturer leases the product to consumers, and bundles repair and maintenance services along with the product. In this paper, we investigate for the optimal leasing price and leasing duration decisions by a monopolist when the production and servicing capacity are constrained. The effect of diffusion of consumers in the installed base is considered, with the ownership of the product resting with the monopolist during the product lifecycle. The monopolist operating the installed base jointly optimizes the profits from leasing the product/service bundle along with maintenance revenues and remanufacturing savings. We formulate the manufacturer's problem as an optimal control problem and show that the optimal pricing strategy of the firm should be a skimming strategy. We also find that the effect of remanufacturing savings on the pricing decision and the length of the leasing duration changes significantly depending on the duration of the product's lifecycle. If the product lifecycle is long and remanufacturing savings are low, the firm should offer a shorter leasing duration while if the remanufacturing savings are high, the firm should optimally offer a higher leasing duration. On the other hand, if the time duration of the product lifecycle is low and remanufacturing savings are low, the firm prefers to offer a shorter leasing duration, while if the remanufacturing savings are high, the firm should optimally have a longer leasing duration. The paper also shows that if the production capacity is small, the manufacturer increases the leasing duration. If the production capacity is very small, the manufacturer sets the leasing duration to be equal to the product lifecycle and does not use remanufacturing.