Integration strategies of luxury rental operations: is it wise to operate with the manufacturer or co-operate with the competitor?

Abstract

Luxury rental operations are increasingly popular nowadays. In this study, we develop game-theoretical models to examine the optimal renter’s integration strategies (RISs) in a luxury supply chain with conspicuous consumers. The luxury supply chain consists of one manufacturer, one seller and one renter. Based on observed industrial practices, we compare three RISs, namely non-integration (the renter works on his own), vertical integration (the renter operates with the manufacturer) and horizontal integration (the renter co-operates with the seller). The main findings are as follows. First, integration is not always a wise strategy for the renter. When the proportion of conspicuous consumers (PCC) is sufficiently high, the renter should work on his own. When the PCC is lower than a threshold, the optimal RIS depends on the trade-off between the double-marginalisation and retail competition effects. Second, we evaluate the environmental impacts of RISs and uncover that the environmental effects depend on the product types’ environmental impact. We further identify the conditions how a dominating situation with respect to profitability and environmental impact can be achieved (called ‘PE dominating’). Third, we investigate the effects of consumer segmentation on the optimal RIS. Managerial implications are discussed.

KEYWORDS:

• Retailing
• sharing economy
• conspicuous consumption
• rental
• luxury
• supply chain structure

Acknowledgements

The authors sincerely thank Editor-in-Chief Prof. Alexandre Dolgui and three invited reviewers for their constructive comments.

Data availability statement

The paper does not include data. All the information is collected online.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 In this paper, we use ‘luxury fashion’ to refer to Haute Couture and designer labels.

2 We consider that consumer utilities for conspicuous consumers to purchase and rent the luxury products depending on the total number of consumers who will buy and rent the product. The rental and purchased consumers are influenced each other in a specific period. Consistent with the real practices in Rent the Runway, consumers can select the day(s) to rent it. The sequence of using the product by consumers will not affect their utilities during this specific period.

3 In Section 6, we consider the market consists of followers and snobs. The main results can hold.

4 In real practices, the rental price may be 10% of the retail price in luxury fashion.

Additional information

Funding

This paper is partially supported by National Natural Science Foundation of China (grant numbers 71871051, and 71832001). Tsan-Ming Choi's research is supported by Yushan Fellow Program (NTU-110VV012).

Notes on contributors

Bin Shen

Bin Shen is a Professor at Glorious Sun School of Business and Management at Donghua University, Shanghai. He is Humboldt Fellow in Germany. Bin has published papers in leading journals in operations management and supply chain management. He is currently an Editor of Sustainable Manufacturing and Service Economics, a Senior Editor of Electronic Commerce Research and Applications, and an Editorial Board Member of Transportation Research Part E: Logistics and Transportation Review.

Yuan Xin

Yuan Xin is a doctoral student in Glorious Sun School of Business and Management in Donghua University, Shanghai. Her research focuses on supply chain management.

Tsan-Ming Choi

Tsan-Ming Choi is currently a Yushan Fellow and Professor in the Department and Graduate Institute of Business Administration, National Taiwan University (NTU). He has published extensively in leading operations management, logistics, and supply chain management journals. He is currently the Co-Editor-in-Chief of Transportation Research Part E, a Department Editor of IEEE Transactions on Engineering Management, a Senior Editor of Production and Operations Management, an Associate Editor of Decision Sciences, and an editorial board member of International Journal of Production Research. He is serving as an external member of the engineering panel of the Research Grants Council (Hong Kong). Before joining NTU, he has taught in two universities in Hong Kong, namely The Chinese University of Hong Kong and The Hong Kong Polytechnic University, for twenty years.

Kejing Zhang

Kejing Zhang is a Full Professor in the College of Humanities, and Glorious Sun School of Business & Management of Donghua University, China. She received her Ph.D. in Management Science and Engineering from the University of Karlsruhe (KIT), Germany. Her research focuses on supply chain decision analysis, supply chain finance, and innovation of sustainable supply chain.