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The Effects of Product Ageing on Demand: The Case of Digital Cameras

Author

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  • Lou, Weifang
  • Prentice, David
  • Yin, Xiangkang

Abstract

The static differentiated product demand model when applied to products with rapid product turnover and declining prices, yields implausible results. One response is to explicitly model the inter-temporal choices of consumers but computational demands require restrictive assumptions on consumer heterogeneity and limits on the characteristics included in the model. We propose, instead, to supplement the static model with a control for the age that each product has been in the market. This approach is applied to the US digital camera market and we find we obtain more plausible estimates. Our results are consistent with inter-temporal price discrimination by firms. Furthermore, our results suggest that ignoring the effects of product ageing may result in substantially overestimated price elasticities and technological progress and underestimated price-cost markups.

Suggested Citation

  • Lou, Weifang & Prentice, David & Yin, Xiangkang, 2008. "The Effects of Product Ageing on Demand: The Case of Digital Cameras," MPRA Paper 13407, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:13407
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    Cited by:

    1. Aguirregabiria, Victor & Nevo, Aviv, 2010. "Recent developments in empirical IO: dynamic demand and dynamic games," MPRA Paper 27814, University Library of Munich, Germany.
    2. Weifang Lou, 2009. "Estimating the Impact of a Potential Process Innovation and the Optimal Strategy of Licensing," Working Papers 2009.03, School of Economics, La Trobe University.
    3. Lou, Weifang & Prentice, David & Yin, Xiangkang, 2012. "What difference does dynamics make? The case of digital cameras," International Journal of Industrial Organization, Elsevier, vol. 30(1), pages 30-40.

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    More about this item

    Keywords

    Discrete Choice; Demand Dynamics; Forward-Looking Behavior; Heterogeneous Preferences;
    All these keywords.

    JEL classification:

    • L0 - Industrial Organization - - General
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L63 - Industrial Organization - - Industry Studies: Manufacturing - - - Microelectronics; Computers; Communications Equipment

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