Product Durability Choice

By Goering, Gregory E.; Pace, R. Kelley | Atlantic Economic Journal, December 1994 | Go to article overview
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Product Durability Choice


Goering, Gregory E., Pace, R. Kelley, Atlantic Economic Journal


Economists differ on whether market structure affects product durability and, consequently, on whether planned obsolescence strategies pay. For example, Swan [AER, 1970] finds market structure does not affect product durability. However, Bulow [QJE, 1986] argues imperfectly competitive firms which sell their output will choose socially sub-optimal durability (planned obsolescence). The literature which assumes each firm exhibits Cournot behavior has devoted surprisingly little attention to the form of conjectures and the choice variable employed. In a simple two-period framework, the authors show that firm behavior can lead to: (1) inefficient durability as in Bulow or (2) socially optimal durability as in Swan. Whether firms engage in planned obsolescence depends upon firm behavior within the industry and not upon market structure per se as often proxied for by the number of firms.

Let [Beta] represent a discount factor and N [is greater than] 1 equal the number of firms in the industry. Suppose that firm i's first and second period output are given by [q.sub.1i] and [q.sub.2i], respectively. For simplicity, assume constant, symmetric conjectural variations:

v = [Delta][q.sub.2j]/[Delta][q.sub.2i](i [is not equal to] j).

Let [c.sub.1]([D.sub.i]) and [c.sub.2] represent the marginal production costs for firm i in periods one and two, where [c.sub.1]([D.sub.i]) is strictly convex in product durability [D.sub.i]. In symmetric subgame perfect equilibria, the maximization of a selling firm's two-period discounted profits [[Pi].sub.i], with respect to the firm's product durability [D.sub.i], then implies (ignoring firm subscripts):

[Delta][Pi]/[Delta]D = [q.

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