Demand uncertainty in a durable goods monopoly

As is well known in the durability literature, the monopolistic renter of durable goods is better off, in terms of profits, than a seller of durable goods. This paper provides an explanation for the persistent and widespread use of sales contracts despite what would appear to be reduced profits. It is shown that, in the presence of demand uncertainty and risk-averse firms, the monopolist has an incentive to offer sales contracts in order to transfer the risk of future demand shocks, to consumers. However, if the monopolist is risk-neutral, rental contracts remain superior to sales contracts, despite the presence of demand uncertainty.