Market Power and Manufacturer Leasing

This paper addresses the issue of manufacturer leasing by considering the implicit tradeoff involved between potential monopoly benefits and tax disadvantages. Analysis of the tax disadvantages, which can be substantial, indicates that manufacturer leasing should be observed only when significant compensating benefits accompany the leasing option. One potentially important benefit to manufacturer leasing derives from the resulting opportunity to control product resale markets; manufacturer leasing is itself a manifestation of market power and is accompanied by the manufacturer's control of product resale. The case study of Xerox Corp. provides empirical support. Rapidly changing competitive conditions in the office copier market which took place throughout the 1970s resulted in a decline in Xerox's market share which is expected to continue. The analysis presented predicts the importance of Xerox rental revenue will continue to diminish, and recent events seem to support this projection; Xerox has announced it will raise rental rates and lower sales prices on some of its copier models.