Immediate sale or stock-up: value of rent-to-own contracts for experience goods

Many high-value experience goods, such as pianos and Chinese zithers, are usually characterized by uncertain future values. As such, a portion of customers (called ‘consumers’) may hesitate to buy the product because they are unsure of the product’s actual value and/or they may expect to buy the product at a lower price in the future. Moreover, the fluctuating future value creates arbitrage opportunities for another group of customers (called ‘speculators’) who may benefit from stocking up a product and reselling it at a higher price at a future time. Considering a firm that sells a limited number of high-value experience goods over two periods, this paper investigates the profitability of a rent-to-own (R2O) contract, under which a consumer can return the product in the future period (e.g. when it turns out to be inappropriate) or buy the product at the realised future price. We study the optimal pricing decisions involved in the R2O contract for two scenarios. In the base model, the uncertain future price is exogenously given, and in the extended model, the future price is endogenously determined by the firm and speculators. Numerical experiments are conducted to evaluate the value of R2O contracts.