Another Perspective on Planned obsolescence: is there really too much Innovation?
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.
|Date of creation:||04 Feb 2003|
|Date of revision:|
|Note:||Type of Document - pdf file; prepared on Scientific Workplace; to print on any printer; pages: 41 ; figures: included in text|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Drew Fudenberg & Jean Tirole, 1997.
"Upgrades, Trade-Ins and BuyBacks,"
Harvard Institute of Economic Research Working Papers
1803, Harvard - Institute of Economic Research.
- Juan Ruiz, 2003. "Machine replacement, Network Externalities and Investment Cycles," Macroeconomics 0302001, EconWPA.
- Shleifer, Andrei, 1986.
Journal of Political Economy,
University of Chicago Press, vol. 94(6), pages 1163-90, December.
- Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
- Durlauf, Steven N, 1991.
"Multiple Equilibria and Persistence in Aggregate Fluctuations,"
American Economic Review,
American Economic Association, vol. 81(2), pages 70-74, May.
- Steven N. Durlauf, 1991. "Multiple Equilibria and Persistence in Aggregate Fluctuations," NBER Working Papers 3629, National Bureau of Economic Research, Inc.
- Rosenberg, Nathan, 1976. "On Technological Expectations," Economic Journal, Royal Economic Society, vol. 86(343), pages 523-35, September.
- Adsera, Alicia & Ray, Debraj, 1998. "History and Coordination Failure," Journal of Economic Growth, Springer, vol. 3(3), pages 267-76, September.
- Swan, Peter L, 1972. "Optimum Durability, Second-Hand Markets, and Planned Obsolescence," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 575-85, May-June.
- 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.
- Gale, D., 1992.
"Dynamic Coordiantion Games,"
13, Boston University - Department of Economics.
- Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 651-667.
- Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 167-82, June.
- Jeremy Bulow, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 729-749.
- Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 273-283.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpio:0302001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.