Rentals, Sales, and Buybacks: Managing Secondary Distribution Channels

The authors analyze a problem facing a durable product manufacturer who has to manage two “noncompeting” channel systems.ln particular, they focus on the practices of U.S. automakers who distribute new cars through both dealers and rental agencies. In their stylized model, the dealer sells cars to customers and the renter satisfies customers’ short-term needs by renting cars. As a result, in the short run, the rental market does not compete with the dealer's market. However, if the renter eventually sells some of its used cars into the consumer market, then these sales can compete with the dealer's sales of new cars. Using a two-period model, the authors analyze three channel structures that exist in today's auto market. They discuss the implications of their work on the structure of distribution channels in the automobile industry and show how dealer profits and total manufacturer sales depend on the type of channel structure used.