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Keeping it Fresh: Strategic Product Redesigns and Welfare

  • Bruce A. Blonigen
  • Christopher R. Knittel
  • Anson Soderbery

Product redesigns happen across virtually all types of products. While there is substantial evidence that new varieties of goods increase welfare, there is little evidence on the effect of product redesigns. We develop a model of redesign and exit decisions in a dynamic oligopoly model (a la Bajari et al (2007)) and use it to analyse redesign activity in the U.S. automobile market. We find that automobile model designs become obsolete quickly in this market, leading to fairly frequent redesigns of models despite an estimated average redesign cost around $1 billion. Our model and estimates show that firm redesign decisions depend crucially on competition for market share through introductions of new redesigns, as well as internal incentives for planned obsolescence of the existing model design. Based on our structural model estimates and the simulated counterfactuals, we find that redesigns lead to large increases in welfare, as well as substantial profit for firms, due to the strong preferences consumers display for new model designs. We also show that welfare would be improved if redesign competition were reduced, allowing redesign activity to be more responsive to the planned obsolescence channel. The net effect of these changes would reduce total redesigns by roughly 10%, increasing total welfare by roughly 3%. While our model and welfare simulations are focused on the new automobile market, we provide some evidence that the gains from redesigns in the new automobile market are an order of magnitude larger than the losses in the secondhand automobile market.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18997.

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Date of creation: Apr 2013
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Handle: RePEc:nbr:nberwo:18997
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  1. Paul A. Grout & In-Uck Park, 2005. "Competitive Planned Obsolescence," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 596-612, Autumn.
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  9. Sorawoot Srisuma, 2010. "Estimation of Structural Optimization Models: A Note on Identification," STICERD - Econometrics Paper Series /2010/547, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  14. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  15. Blonigen, Bruce A. & Soderbery, Anson, 2010. "Measuring the benefits of foreign product variety with an accurate variety set," Journal of International Economics, Elsevier, vol. 82(2), pages 168-180, November.
  16. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  17. Jiawei Chen & Susanna Esteban & Matthew Shum, 2010. "How much competition is a secondary market?," Working Papers 2010-06, Instituto MadrileƱo de Estudios Avanzados (IMDEA) Ciencias Sociales.
  18. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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