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Planned Obsolescence and the Provision of Unobservable Quality

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Author Info
Roland Strausz () (Free University of Berlin, Department of Economics)

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Abstract

This paper develops the idea that obsolescence acts as an incentive device to provide quality for experience goods. The argument is that obsolescence affects the frequency at which consumers repurchase products and may punish producers for a lack of quality. A higher rate of obsolescence enables a firm to convince its consumers that it provides high quality. We identify a trade--off between quality and durability, implying that the two are substitutes. This leads to excessive obsolescence. The inefficiency is due to unobservability and not monopolistic distortions. The theory follows naturally from the theory of repeated games.

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Paper provided by Departmental Working Papers in its series Papers with number 028.

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Related research
Keywords: Obsolescence; unobservable quality; reputation; repeated games;

Find related papers by JEL classification:
L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior

This paper has been announced in the following NEP Reports:

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  1. Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Blackwell Publishing, vol. 42(2), pages 167-82, June. [Downloadable!] (restricted)
    Other versions:
  2. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr. [Downloadable!] (restricted)
  3. Jay Pil Choi, 2001. "Planned Obsolescence As A Signal Of Quality," International Economic Journal, Korean International Economic Association, vol. 15(4), pages 59-79, December. [Downloadable!] (restricted)
  4. Swan, Peter L, 1970. "Market Structure and Technological Progress: The Influence of Monopoly on Product Innovation," The Quarterly Journal of Economics, MIT Press, vol. 84(4), pages 627-38, November. [Downloadable!] (restricted)
  5. Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 729-49, November. [Downloadable!] (restricted)
  6. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April. [Downloadable!] (restricted)
  7. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  8. Shapiro, Carl, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 659-79, November. [Downloadable!] (restricted)
  9. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law & Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  10. Jae Nahm, 2004. "Durable-Goods Monopoly with Endogenous Innovation," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 13(2), pages 303-319, 06. [Downloadable!] (restricted)
  11. Schmalensee, Richard, 1979. "Market Structure, Durability, and Quality: A Selective Survey," Economic Inquiry, Oxford University Press, vol. 17(2), pages 177-96, April.
  12. Glenn Ellison & Drew Fudenberg, 2000. "The Neo-Luddite's Lament: Excessive Upgrades in the Software Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 253-272, Summer.
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  13. Michael Waldman, 1996. "Planned Obsolescence and the R&D Decision," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 583-595, Autumn. [Downloadable!] (restricted)
  14. Waldman, Michael, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 273-83, February. [Downloadable!] (restricted)
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