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Durable Goods and Product Obsolescence

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Author Info

  • Daniel A. Levinthal

    (Carnegie-Mellon University)

  • Devavrat Purohit

    (Carnegie-Mellon University)

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    Abstract

    The issue of product obsolescence is addressed by examining the optimal sales strategy of a monopolist firm that may introduce an improved version of its current product. Consumers' expectations of a forthcoming product lowers the price that they are willing to pay for the current product because of its loss in value due to obsolescence. The new product is characterized by consumers' increased willingness to pay and by its competitive interaction with the old product. These characteristics affect the tradeoff that the firm makes between the cost of waiting for new product sales versus the cost of cannibalizing these sales. We analyze the effect of these characteristics of the new product on the firm's optimal sales strategy. We consider the various policy measures available to the firm, including limiting initial sales in order to lower cannibalization of the new product, buying back the earlier version of the product in order to generate greater demand for the new product, and announcements of future product introductions. We find that, for modest levels of product improvement, the firm's optimal policy is to phase out sales of the old product, while for large improvements a buy-back policy is more profitable. Lastly we find that the firm is better off if it informs consumers whether a new product is forthcoming.

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    File URL: http://dx.doi.org/10.1287/mksc.8.1.35
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    Bibliographic Info

    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 8 (1989)
    Issue (Month): 1 ()
    Pages: 35-56

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    Handle: RePEc:inm:ormksc:v:8:y:1989:i:1:p:35-56

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    Related research

    Keywords: durable goods; product obsolescence; buy-backs; cannibalization;

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    Citations

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    Cited by:
    1. Heese, Hans S. & Cattani, Kyle & Ferrer, Geraldo & Gilland, Wendell & Roth, Aleda V., 2005. "Competitive advantage through take-back of used products," European Journal of Operational Research, Elsevier, vol. 164(1), pages 143-157, July.
    2. Judith Chevalier & Austan Goolsbee, 2009. "Are Durable Goods Consumers Forward-Looking? Evidence from College Textbooks," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1853-1884, November.
    3. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
    4. Kai-Lung Hui & Qiu-Hong Wang, 2005. "Delayed Product Introduction," Industrial Organization 0503011, EconWPA.
    5. Michael Waldman, 2004. "Antitrust Perspectives for Durable-Goods Markets," CESifo Working Paper Series 1306, CESifo Group Munich.
    6. Kohli, Chiranjeev, 1999. "Signaling New Product Introductions: A Framework Explaining the Timing of Preannouncements," Journal of Business Research, Elsevier, vol. 46(1), pages 45-56, September.
    7. Eric BROUILLAT (GREThA, CNRS, UMR 5113), 2011. "Durability of consumption goods and market competition: an agent-based modelling," Cahiers du GREThA 2011-31, Groupe de Recherche en Economie Théorique et Appliquée.
    8. Chih-yi Chi, Woody & Wu, Shufen, 2006. "Intertemporal quality discrimination of a durable good monopolist," Economics Letters, Elsevier, vol. 92(2), pages 184-191, August.
    9. Calzada, Joan & Valletti, Tommaso, 2011. "Intertemporal movie distribution: Versioning when customers can buy both versions," CEPR Discussion Papers 8279, C.E.P.R. Discussion Papers.
    10. Drew Fudenberg & Jean Tirole, 1998. "Upgrades, Tradeins, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 235-258, Summer.
    11. Evrim Dener, 2011. "Quality uncertainty and time inconsistency in a durable good market," Journal of Economics, Springer, vol. 104(1), pages 1-24, September.
    12. Canan Savaskan & Charles J. Corbett, 2001. "Contracting and Coordination in Closed-Loop Supply Chains," Discussion Papers 1327, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    13. Edward Kutsoati & Jan Zabojnik, 2001. "Durable Goods Monopoly, Learning-by-doing and "Sleeping Patents"," Discussion Papers Series, Department of Economics, Tufts University 0105, Department of Economics, Tufts University.
    14. Evrim Dener, 2007. "Quality Uncertainty and Time Inconsistency in a Durable Good Market," Departmental Working Papers 0707, Southern Methodist University, Department of Economics.
    15. Qiu_Hong Wang & Kai-Lung Hui, 2005. "Technology Timing and Pricing In the Presence of an Installed Base," Industrial Organization 0512013, EconWPA.
    16. Kutsoati, Edward & Zabojnik, Jan, 2005. "The effects of learning-by-doing on product innovation by a durable good monopolist," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 83-108, February.
    17. Zhao, Hao & Jagpal, Sharan, 2009. "Upgrade pricing, market growth, and social welfare," Journal of Business Research, Elsevier, vol. 62(7), pages 713-718, July.
    18. Kim, Sang-Hoon & Srinivasan, V. "Seenu", 2006. "A Conjoint-Hazard Model of the Timing of Buyers' Upgrading to Improved Versions of High Technology Products," Research Papers 1720r1, Stanford University, Graduate School of Business.
    19. Atsuo Utaka, 2000. "Planned obsolescence and marketing strategy," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 21(8), pages 339-344.

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