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A Dynamic Model of Consumer Replacement Cycles in the PC Processor Industry

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  • Brett R. Gordon

    ()
    (Columbia Business School, New York, New York 10027)

Abstract

As high-tech markets mature, replacement purchases inevitably become the dominant proportion of sales. Despite the clear importance of product replacement, little empirical work examines the separate roles of adoption and replacement. A consumer's replacement decision is dynamic and driven by product obsolescence because these markets frequently undergo rapid improvements in quality and falling prices. The goal of this paper is to construct a model of consumer product replacement and to investigate the implications of replacement cycles for firms. To this end, I develop and estimate a dynamic model of consumer demand that explicitly accounts for the replacement decision when consumers are uncertain about future price and quality. Using a unique data set from the PC processor industry, I show how to combine aggregate data on sales and product ownership to infer replacement behavior. The results reveal substantial variation in replacement behavior over time, and this heterogeneity provides an opportunity for managers to tailor their product introduction and pricing strategies to target the consumers of a particular segment that are most likely to replace in the near future.

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File URL: http://dx.doi.org/10.1287/mksc.1080.0448
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Bibliographic Info

Article provided by INFORMS in its journal Marketing Science.

Volume (Year): 28 (2009)
Issue (Month): 5 (09-10)
Pages: 846-867

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Handle: RePEc:inm:ormksc:v:28:y:2009:i:5:p:846-867

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Related research

Keywords: durable goods; replacement; structural estimation; dynamic programming; innovation; upgrades; PC processor; CPU; technology products;

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Cited by:
  1. Bart Bronnenberg & Jean Dubé & Carl Mela & Paulo Albuquerque & Tulin Erdem & Brett Gordon & Dominique Hanssens & Guenter Hitsch & Han Hong & Baohong Sun, 2008. "Measuring long-run marketing effects and their implications for long-run marketing decisions," Marketing Letters, Springer, vol. 19(3), pages 367-382, December.
  2. Stephen Ryan & Catherine Tucker, 2012. "Heterogeneity and the dynamics of technology adoption," Quantitative Marketing and Economics, Springer, vol. 10(1), pages 63-109, March.
  3. Pinar Karaca-Mandic, 2011. "Role of complementarities in technology adoption: The case of DVD players," Quantitative Marketing and Economics, Springer, vol. 9(2), pages 179-210, June.
  4. Pasquale Schiraldi, 2011. "Automobile replacement: a dynamic structural approach," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 266-291, 06.
  5. Hartmann, Wesley R. & Nair, Harikesh S., 2007. "Retail Competition and the Dynamics of Consumer Demand for Tied Goods," Research Papers 1990, Stanford University, Graduate School of Business.
  6. Pillai, Unni, 2011. "A model of technological progress in the microprocessor industry," MPRA Paper 31881, University Library of Munich, Germany.
  7. Adam Copeland & Adam Hale Shapiro, 2013. "Price setting in an innovative market," Working Paper Series 2013-04, Federal Reserve Bank of San Francisco.

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