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Regulation and the Durability of Goods

Listed author(s):
  • Richard L. Schmalensee

This paper considers the production of durable goods that deteriorate at a constant percentage rate under conditions of competitive and monopoly equilibrium. A perfect market in used units of the good is assumed, as is constant returns to scale in production. It is shown that a monopolist will generally produce goods that deteriorate faster than those produced by a competitive industry. Regulation of the durability of the monopolist's output will always cause him to increase the volume of services of the good available to the market. Government intervention to limit the monopolist's price-cost margin may cause the firm to increase the deterioration rate of its output, and such regulation may also lead the monopolist to decrease the volume of services of the good available to the market. In this case, regulation will have effects exactly contrary to the presumed intent of the regulators. The impact of price regulation is shown to depend on the shape of the demand curve for the services of the durable good. Finally, it is pointed out that both price and durability must be regulated if a monopolist is to be made to reproduce competitive performance.

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Article provided by The RAND Corporation in its journal Bell Journal of Economics.

Volume (Year): 1 (1970)
Issue (Month): 1 (Spring)
Pages: 54-64

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Handle: RePEc:rje:bellje:v:1:y:1970:i:spring:p:54-64
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