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Another Perspective on Planned obsolescence: is there really too much Innovation?

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  • Juan Ruiz

    (Universidad Carlos III de Madrid)

Abstract

Models of durable goods with network externalities that set instantaneously have emphasized that a monopolist selling those goods has too high an incentive to introduce new vintages of the durable good, to make previous vintages (already bought by consumers) obsolete. This is referred to as planned obsolescence. We examine the robustness of planned obsolescence to the inclusion of network externalities that set in with a lag. If externalities set in with a lag (however small), consumers have an incentive to wait for other consumers to adopt the new vintage first, and in the absence of any change in prices, that leads to inefficient delay in adoption. Combining the two types of incentives we show that the monopolist is able to overcome consumer's inertia and still generate planned obsolescence through both intratemporal and intertemporal price discrimination. However, if monopoly power is "short lived" (for example due to copying), we show that, depending on the parameters of the model, we could have both types of inefficiencies: planned obsolescence or delay. Delay is brought about because copying limits the ability of the monopolist to increase prices in the future and therefore gives consumers an incentive to wait for both the onset of the (lagged) externality effect and the reduction in price caused by copiers. Delay appears mainly when the externality effect is strong and the new vintage is a significant improvement over the existing durable good.

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File URL: http://128.118.178.162/eps/io/papers/0302/0302001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 0302001.

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Length: 41 pages
Date of creation: 04 Feb 2003
Date of revision:
Handle: RePEc:wpa:wuwpio:0302001

Note: Type of Document - pdf file; prepared on Scientific Workplace; to print on any printer; pages: 41 ; figures: included in text
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Web page: http://128.118.178.162

Related research

Keywords: Planned obsolescence; durable goods; lagged network externalities; monopoly; delay.;

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References

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  1. Gale, D., 1992. "Dynamic Coordiantion Games," Papers 13, Boston University - Department of Economics.
  2. Rust, John, 1986. "When Is It Optimal to Kill Off the Market for Used Durable Goods?," Econometrica, Econometric Society, vol. 54(1), pages 65-86, January.
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Cited by:
  1. Di Maria, Corrado & K├Âttl, Johannes, 2002. "Lagged Network Externalities and Rationing in a Software Monopoly," Economics Series 120, Institute for Advanced Studies.
  2. Qiu_Hong Wang & Kai-Lung Hui, 2005. "Technology Timing and Pricing In the Presence of an Installed Base," Industrial Organization 0512013, EconWPA.

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