Maintenance contracts for leased goods: their role in creating brand loyalty

Using a two-period switching cost model, this paper compares rental profit with sales profit in a framework in which duopolists produce horizontally differentiated durable goods. Rental firms use maintenance contracts that stipulate that repeat customers pay a lower fine per unit of damage than do those customers who switch to a rival firm. In the sales regime, firms give loyal customers a discount on their second period prices. If switching costs are zero, sales profit equals rental profit. For positive and identical switching costs, either regime can dominate. As the exogenous rate of depreciation falls, rental profit exceeds sales profit. Copyright © 2000 John Wiley & Sons, Ltd.