Rent, Retrieve, Repeat Until Sold: Demand Process Specification and Modular Estimation Framework for the Rent-to-Own Business
Milad Armaghan, Metin Çakanyıldırım, Andrew E. Frazelle, Daniel Glasky, Divakar Rajamani
Journal of Operations Management · 2025 · Volume 71 · Issue 8
Abstract
Rent-to-own (RTO) firms rent products for a periodic fee and allow a renter to buy the rented product at specified buyout prices during the rental. Accurately capturing the renters' decision process, as well as their ownership and rental utilities, is required for determining their willingness to pay buyout prices in different periods. We develop a modular framework that cleanly separates solving a renter's decision problem from estimating utility. We consider renters with varying degrees of sophistication and alertness to buyout offers. Using washer, dryer, and mattress data from a prominent RTO firm, for each decision model, we estimate utilities and the probabilities of abandoning the rental, neglecting the buyout offer, and considering the buyout offer. We find that renters have short decision horizons and frequently neglect buyout offers. Also, their utilities remain stable throughout the rentals. Moreover, renters who opt for rental agreements with higher rental fees or longer terms tend to have higher ownership utilities. Based on our counterfactual analyses, for washer or dryer renters, we suggest initiating efforts to remind renters of buyout offers. In contrast, for mattresses, whose renters more frequently consider buyout offers, we find that profits would be increased by setting prices higher.
Keywords
counterfactual analysis, dynamic structural estimation, finite mixture model, strategic/myopic and alert/inert renter
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