Pricing with market power review questions

customers to purchase more and lease less. If they succeed, this could make 
life more difficult for IBM’s major competitors. Outright purchases of 
computers are needed for ever larger IBM revenues and profits, says Morgan 
Stanley’s Ulric Weil in his new book, Information Systems in the ‘80’s. Mr. 
Weil declares that IBM cannot revert to an emphasis on leasing.” 
a. 
Provide a brief but clear argument in support of the claim that IBM should try “to 
get its customers to purchase more and lease less.” 
If we assume there is no resale market, there are at least three arguments that could be 
made in support of the claim that IBM should try to ―get its customers to purchase 
more and lease less.‖ First, when customers purchase computers, they are ―locked 
into‖ the product. They do not have the option of not renewing the lease when it 
expires. Second, by getting customers to purchase a computer instead of leasing it, 
IBM leads customers to make a stronger economic decision for IBM and against its 
competitors. Thus, it would be easier for IBM to eliminate its competitors if all its 
customers purchased, rather than leased, computers. Third, computers have a high 
obsolescence rate. If IBM believes that this rate is higher than what their customers 
perceive it is, the lease charges would be higher than what the customers would be 
willing to pay and it would be more profitable to sell the computers instead. 
b. 
Provide a brief but clear argument against this claim. 
The primary argument for leasing computers to customers, instead of selling the 
computers, is that because IBM has monopoly power on computers, it might be able to 
charge a two-part tariff and therefore extract some of the consumer surplus and 
increase its profits. For example, IBM could charge a fixed leasing fee plus a charge 
per unit of computing time used. Such a scheme would not be possible if the 
computers were sold outright.