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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.

Suggested Citation

  • Juan Ruiz, 2003. "Another Perspective on Planned obsolescence: is there really too much Innovation?," Industrial Organization 0302001, EconWPA.
  • 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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    File URL: http://econwpa.repec.org/eps/io/papers/0302/0302001.pdf
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    References listed on IDEAS

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    Cited by:

    1. Qiu_Hong Wang & Kai-Lung Hui, 2005. "Technology Timing and Pricing In the Presence of an Installed Base," Industrial Organization 0512013, EconWPA.
    2. Di Maria, Corrado & K├Âttl, Johannes, 2002. "Lagged Network Externalities and Rationing in a Software Monopoly," Economics Series 120, Institute for Advanced Studies.

    More about this item

    Keywords

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

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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