The Durability of Goods and Regulation of Monopoly

This paper reconsiders the proposition put forward by many economists that monopolies would produce less durable assets than would competitive firms. The key assumption made is that assets are desired for the services they provide. It is shown that, as all firms desire to minimize the cost of providing any given service, monopoly and competitive firms will select the same degree of durability. Although this result is proved for goods subject to exponential decay, the result can be generalized to an arbitrary decay function. A number of earlier writers reached mistaken conclusion basically because of their neglect of the initial demand for the good. Durability choice by a monopolist is unaffected by price or demand conditions so long as the firm is permitted to operate in the elastic portion of the demand curve. Price regulation will have no effect on the choice of durability unless an attempt is made to force the firm to operate in the inelastic portion of the demand curve. If this attempt is made, output will remain unchanged and costs will be increased so as to satisfy the unit cost mark-up constraint. In this case, the regulator should ensure that durability remains unaltered at the previous level.