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I. INTRODUCTION
marketshave
competitive
Suppliersofdurablesin imperfectly
shortusebeensuspectedofproducing
goodswithuneconomically
fullives,so thatconsumerswill have to repurchasemoreoften.'
However,thetheorybehind"plannedobsolescence"has beennotablyweak.2Will customersnotpay less forproductsthathave
a shorterusefullife?If the firmdecidesto sell customersany
behaviornotimply
givenflowofservices,doesprofit-maximizing
producingthoseservicesas cheaplyas possible?3These are the
questionswithwhichan economictheoryofplannedobsolescence
must deal.
CCC 0033-5533/86/040729-21$04.00
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730
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731
ficientlevelofdurability,
themonopolist's
profit-maximizing
rate
ofdurabilityis shownto equal theefficient
levelplus a termthat
is generallynegative.
SectionIII extendsthebasicmodeltooligopolies.Oligopolists
must add an extra termto the monopolist'sdurabilitychoice,
to decreasethe
generallycausingthem(in quantitycompetition)
rate ofobsolescence.
SectionIV providesillustrationsofmonopolyand oligopoly
durabilitychoiceto indicatehow an oligopolistor a monopolist
facingactual or potentialentrywill change obsolescencefrom
efficient
levels.The monopolist
facingentrymaychoosedurability
toeffectively
becomea Stackelbergleaderinthepost-entry
period.
We also findthatan oligopolisticindustrycan gain by colluding
to increasetherateofobsolescencebeyondnoncooperative
levels.
In SectionV we examinethe strategicconsequencesto imperfectly
competitive
firmsofrentingversusselling.Increasing
the sales-rentalratio is the strategicequivalentof increasing
This analysissuggeststhatpriorto introducing
a new
durability.
modelin an oligopolistic
marketa firmmaychooseto sell rather
thanrentitsoldunits.Thisincentiveexistseventhougha greater
sales-rentalratiowiththe stockofoutstandingunitsunchanged
willlead to a lowersales price.The analysisalso predictsthatas
a monopolist'smarketsbecomemorecompetitive,
the firmwill
increaseits sales-rentalratio.This predictionis looselycorroboratedempirically.
SectionVI summarizesand concludesthe paper.
732
(1)
ql,q2,8
- Cl(ql,8) - C2(q2),
(2)
aq,
(3)
(4)
Aac1
=f+
qif,+
al7T
= f2 + (8q1
~ ~
aq2~
= qlf2 + (8ql
+ q2)f2 - C2 =
aq,
=0
~~~C
+ q2)qlf2
d_
0.
1 aC1
-,8-=
C2.
733
q2f2(8qi
q2) - C2(q2),
q2
the solutionofwhichimpliesthat
(6)
q2f2 + f2 - C2 = O.
is thatin the
Notehow (6) compareswith(3): the difference
an
extra
unitit conwhen
secondperiod
themonopolist
produces
ofthatuniton thepricehe receivesfortheother
siderstheeffect
q2unitssold(and thussetsMR = q2j + f2 = MC = CD)butdoes
not considerthe reductionin the rentalvalue ofthe unitspreviouslysold but now ownedby others,8qlf2.Of course,rational
consumersrecognizethatthe monopolistwill notconsidertheir
interestsin the secondperiodand will adjustthe pricetheyare
willingto pay forfirst-period
purchasesaccordingly.
Thus,with
rationalconsumersthe presentvalue ofthe firm'srevenuewill
equal the presentvalue ofthe implicitrentsits sales generate,
so the firmstill wishesto maximize(1). It mustdo so, however,
with(6) as a constraint.1Maximizing(1) subjectto (6), by cal-
are
10. Expositionsofthe dynamicproblemofthedurablegoodsmonopolist
providedby Coase [1972],Bulow [1982],Kahn[1982],and Stokey[1981].Two
and
recentpapersofinterestin thisfieldare Sobel [1984]and Conlisk,Gerstner,
fortwomajor
and Wilson[1985]are responsible
Sobel[1984].Gul,Sonnenschein,
problemas
advancesin thefield,beingthefirstto modelthedynamicmonopoly
thefirstgeneralproofofCoase's originalintuition.
a formalgameand providing
11. Notethatifthe firmcouldrentits outputinsteadofsellingit, themoproblem.The reasonis withrentals
nopolistcouldmaximizethe unconstrained
unitsand is thusable to internalize
ownsall ofthe outstanding
themonopolist
For
thecapitallosson oldunits.However,in somemarketsrentalis impractical.
thedamage
example,theautorentalmarketfacesa seriousprobleminmonitoring
cannotforcerentersto treatthe cars as ifthey
causedby rentersand therefore
copiers,and shoemachinery)
weretheirown.In somemarkets(e.g.,computers,
has requireda dominantfirmto sell insteadofrentsomeofits
thegovernment
output.
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734
deterthatdq2Idiql is implicitly
and recognizing
culatingdiT/d8
leads to the followingconditionon duminedby the constraint,
rability:
1 a
(7)
C' +
8qlf2'
d(iq1 + q2)
(8)
dcql
- C2
2f2 + q2f2'
C2
whichcan be writtenas
(8')
d(8qi + q2) slopeofdemandcurve - slopeofMC curve
slope ofMR curve - slopeofMC curve
d~ql
of(8') mustbe negative:aroundthe optiThe denominator
mumthe slope of the marginalrevenuecurvemustbe steeper
thanthe slopeofthe marginalcostcurve.Ifthe demandcurveis
moresteeplydownwardslopingthan the marginalcost curve,
thenthe numeratoris also negative,and (8') is positive.In this
case an increasein iq1caused by increasingdurabilityalso inchooses
themonopolist
creases iq1+ q2,and becauseofthiseffect
Ifthemarginalcost
a lowerdurability,
or"plannedobsolescence."
curveis steeperthanthe demandcurve,an increasein 8q1leads
chooses
therefore
to a decreasein (8q1 + q2),and the monopolist
12 Fortheremainder
ofthepaper
toproducetoodurablea product.
we shall assume the "normal"case ofthe demandcurvebeing
12. For example, if p2 = ?L - 8q - P8q2 and MC2 = Y - (P + E)q2, then
-1-1/(P - E)8q1,so an increasein 6ql ofoneunitwilldecrease
-Ye)
q2 = (O -
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735
moresteeplydownwardslopingthanthe marginalcostcurve,in
which case the monopolistunambiguouslychooses an insufficientlydurableproduct.13
Thus,themonopolist
willgenerallychoosea durability
below
efficient
levels.14However,in theunusualcase wherean increase
in iq1will decrease iq1+ q2, which is the case when around
equilibrium
themarginalcostcurveslopesdownward
moresteeply
thanthe demandcurve,the monopolist
will producetoodurable
a product.
In reality,plannedobsolescenceis just one ofseveralways
in whicha monopolist
mightmitigatethe commitment
problem.
Whilethereis no roomforit in ourfinitetime,fullinformation,
one-product
model,firmsmay expendresourcesto establisha
reputationas suggestedby Kreps and Wilson[1982].Theymay
do so bydevelopinga patternforpricinga particularproductover
timeor throughpricingrelatedproductsthat are producedsequentially.(A publishercan gain a reputationforenforcing
a
substantialwait betweenthe publicationof hardcoverand paperbackeditions,forexample.)Also,a monopolist's
curtailment
ofcapacitywillaffect
costcurvesand thusbe a wayofcommitting
to limitfutureoutputs.The pointofthispaper is thatas economistswe wouldexpectthefirmtouse all themeansat itsdisposal
to reduceits commitment
problem,and the envelopetheorem
impliesthat a monopolistwill use at least a littleplannedobsolescence.The two-period
limitation(versussome largerfinite
numberofshorterperiods)does not alter the qualitativeimpliq2 by f/(3- -) and thusdecrease6q, + q2 by E/(f- e). Whydoes thishappen?
Considertheexperiment
where8q, is increasedbyone,and we wishto discover
whetherqa is decreasedby less or morethanone. If 8qi is increasedby one and
q2 is decreased by exactly one, second-periodmarginal revenue,
q2f2(8aql + q2) + f2(Sql
+ q2),
changes by
-f2,
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736
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737
(9)
8q1 +
q2 + q2)
q1,8,q2
- Cl(8,ql) - C2(q2)
subject to
f2
+ q2f2 - C2 =
and subject to
f2
+ qcf2
CC, = O.
C = 1,...
n,
theoligopolist,
and thefinaln constraints
recognizethatin choosing8q1the oligopolistis also implicitly
choosinghis competitor's
C2 +
(10) 1- aC1 = C'
-
qf( d(
dqIq1
+ (8q1
q2)
+-
q2)f2~q1
versionofthisproblem
paperdiscussingtheoligopoly
18.Thefirstsignificant
horizonsupergameframehasjust beenwrittenbyGul [1985].Usingan infinite
Gul showsthatthereare multipleequipricecompetitors,
workwitholigopolistic
to a
libria,one ofwhich(as the lengthofa periodto whicha firmis committed
precommitment
close to the monopolistic
fixpricebecomessmall) is arbitrarily
assumesnodepreciation.
Gul'spaper,likemostofthepreviousliterature,
solution!
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738
in theparagraphabovecan be guaranteedbytwoplausible
19.The condition
assumptions. Define the total number of units on the market as
rentsin thesecond
Q 8qi + q2 + 8q1 + q2, and definethetotalvalue ofimplicit
periodas TR2 Qf2(Q). Then the two assumptionsare firstthatno individual
firmis producing
morethan 2Q in the secondperiodalone; and second,assume
= aMR2/aQ
< 0,industry
inoutput.
marginalrevenueis decreasing
thata2TR28aQ
involvingsome strategic
The details are leftto the reader.Withcompetition
mayhave a strategicincentiveeither
an oligopolist
variableotherthanquantity,
or to decreasedurability.
to increasedurability(as withquantitycompetition)
is whetheran increasein A's durabilitywill raise or
The crucialdeterminant
of adoptinga more"aggressive"second-period
lowerthe marginalprofitability
reduces
A's increaseddurability
Forexample,withquantitycompetition
strategy.
to become
ofextraoutputand thuscauses competitors
themarginalprofitability
an increasein A's
"lessaggressive"byreducingquantity.Withpricecompetition
to chargea lowersecond-period
durability
maycause competitors
price;a "more
In thelanguageof
on A's profits.
aggressive"strategythathas a negativeeffect
Bulow,Geanakoplos,and Klemperer[1984],the analogyto thelast termin (10)
ifits
will cause A to increasedurability
competition
in generalizedoligopolistic
andwillcauseA todecrease
substitute
regardA's outputas a strategic
competitors
See also
complement.
ifitscompetitors
regardA's outputas a strategic
durability
theexcellentpaperbyFudenbergand Tirole[1984].
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739
740
first-period
problemcan
q2 = (a - 8q, - C)A3P,the monopolist's
be thoughtofas
(11)
max qjot - fqj - C) + (8q1 + q2)(O - f(8q1 + q2 + q2) - C)
q1,8
subjectto
q2
q2 = (-
- p8q - C)I33.
totheconstraints
0) canbe simplified
above.)Solving(11) yields
q, = (ot - C)I2pl,
iq = (o - C)/41 -> 8 =
2,
C)I4p.
So the optimumdepreciationrate,ifall technologiesare equally
efficient,
is 1 - 8 = 50 percent.Presumablyif first-period
technologiesweredifferentially
efficient,
themonopolist
wouldchoose
a durabilitysomewherebetween50 percentand the maximally
efficient
level.
It is worthnotingthatin thisproblemthemonopolist
is able
toproducethemonopoly
quantityin thefirstperiodand bychoosing its durabilityachievethe Stackelbergleaderpositionin the
secondperiod,where8q1 + q2 = (a - C)12f3and q2 = (a - C)!
in durability
43.20 This is a simpleillustrationofthe tradeoffs
whereincreaseddurabilityimpliesa lowersecond-period
price
but a biggermarketshareforthe incumbent.
q2 = q2=
Example2: Symmetric
Oligopoly
Usingthesame setupas in Example1, we solveforthesymmetricperfectCournot-Nash
equilibriumin a gamewithn firms
in each oftwoperiods.We lookat theproblemofa firm
producing
choosingq1 and 8 in thefirstperiodand q2in thesecond,knowing
that its (n - 1) competitors
will each produce_qunits with a
20. This Stackelbergresultcan be derivedunderreasonablygeneralcondi-
tions.
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741
- C) + (8q, +
ql,8
i(n - 1)41 +
q2 +
(n
q2)(O
1)q2)
(8
C)
subjectto
q2 =
q2 =
(ot -
=(n + 1)'
=
=(n2
of -
= (n2 +
1)'
n+ - 1
n2 + 1-
For a monopolist
(n = 1) theoptimalvalue of8 is zero:there
is a disadvantageto durabilityin thatit causes lowfutureprices;
thereis no corresponding
advantageto a monopolistin causing
tocutbackonfutureoutput.21In thisexample8 = 0.6
competitors
fora duopolyand approaches1 as n increases.Whileoligopolists
do have a durabilitytradeoff,
thisresultdoes notimplythatwith
technologiesofdifferential
that moreand morefirms
efficiency
in the industrywill lead to moreand moreexcessivedurability.
As morefirmsenter,profitmarginsdecrease,and firmscannot
afford
to strayso farfromefficient
production
techniques.
21. Notethatthe optimalvalue fora monopolist's
8 is zero;thefirmwould
notchoosea negative8 evenifpossible.What,economically,
is a negativedepreciationrate?BarryNalebuffsuggeststhatit has a rolein a modelofaddiction:
forgiven8, themoreunitssoldin thefirstperiod,thegreaterthedemandin the
secondperiod.Ifourfriendly
weresellingheroin,thenit wouldprefer
monopolist
thattheproductbe neithersatiatingnornonaddictive:
thosewhodo
intuitively,
buyin thefirstperiodwillbe "hooked"and pay a big second-period
priceforthe
butthiswillnotcompensate
whonevertrytheproduct
product,
forthecustomers
becauseofits addictivequality.
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742
and Collusion
EntryDeterrence
Inspectionofthe examplesalso providesintuitionabout issues of entrydeterrenceand oligopolisticcollusion.Increasing
durabilityreducesthe demandfornew units and thus reduces
ofall firmsincludinga new entrantin period2.
theprofitability
mightchoosea durabilityin excess
In Example1,themonopolist
of0.5 ifthereare fixedcostsofentryand theincreaseddurability
will prevententry.22
Example2 can be used to showthe advantageto oligopolists
ofcolludingon the durabilityoftheirproducts.It is easy to ascertainthatthehigherthedurabilityofperiod1 output,thelower
the equilibriumpricein period2. In this exampleiffirmswere
constrainedto choosinga lowerlevel of durabilityin period1,
theywouldend up (weakly)increasingq1 relativeto whatthey
wouldchooseat the Nash durabilityand reducing8q1 + q2. For
example,in a collusiveagreementto set 8 = 0, the firmswould
profits
all setq1 = q2 = (ot- C)I(n + 1)f and earnCournot-Nash
beproblem
maximization
foreach oftwoperiods.Formally,the
=
that
8
the
81,
constraint
comesthesame as (12) withtheadded
collusive8.23 In the example,industryprofitsare increased,the
withoutcollusionfirms
Intuitively,
lowerthecollusivedurability.
wherethe total dethe
point
up
to
chooseincreaseddurability
is zero.But
to
durability
respect
with
profits
own
of
their
rivative
firms'
increasing
effectively
durability,
at thispointincremental
So
if
it is
profits.
reduces
competitors'
quantity,
second-period
on
but
not
price,
of
obsolescence
rate
on
the
possibleto collude
firmswill be able to increaseindustryprofitsby reducingduralevels.
bilityfromnoncooperative
If an oligopolysuch as the Americanautomobileindustry
werecolludingon durability,then,it wouldlikelybe in the directionofplannedobsolescence.The entryofforeigncompetitors
wouldthenmovedurato make the industrymorecompetitive
levels.
bilitytowardefficient
foroperatingin the
22. Ifthefixedcostsalso mustbe paid bythemonopolist
secondperiod,the monopolist
mayevenbe betteroff.A highenoughdurability
in period2,
to notproducing
to precommit
permitthemonopolist
mayeffectively
profits.
raisingthepricereceivedin period1 and thepresentvalue ofdiscounted
23. LetXe
[(n +
1)2 +
8(n - 1)]/[(n +
1)3 + 82(n2
eachfirm
in Example2 wouldchooseqi = X(ot- C)43andq2 = (1 - n8X)(ot- C)!
P(n + 1). Industryprofitsover the two periodswill be Hi + R12= (ot - C)21
P(nX(1 - nX) + nI(n + 1)2(1 + 8X)(1 - n8X)) which turns out to be decreasing
in 8 over the range 0 S 8 S 1.
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743
744
nopolisthas an incentivetorent,provingtocustomers
thatit will
notreducepricestoomuchin thefuture.By contrast,a firmthat
eitherfacesor will shortlyface some competitors
in its current
productline or somecloselyrelatednew productswill also have
a contrasting
incentiveto sell. The sales, like greaterdurability,
freethefirmto place morenewunitsin thefutureand maythus
improvethefirm'scompetitive
position.Additionally,
thesmaller
a firm'smarketsharethe moreelasticits demandforany given
marketelasticity.Withpriceless sensitiveto any givenpercentage changein the firm'squantity,thereis less incentiveto rent
ratherthan sell to committo low quantity.
To checkthe predictionthat as a dominantfirmencounters
morecompetition
it willincreaseits sales-rentalratio,I gathered
all publiclyavailable data onthebreakdownofrevenuesbetween
sales and rentalsforbothIBM and Xerox.As Table I shows,both
firmshave substantiallyincreasedtheirsales-rentalratiossince
1970.
thereare at least fivecaveatsthatreducethe
Unfortunately,
TABLE I
BREAKDOWN OF REVENUES, 1966-1983
IBM
Percentage
Sales Rentals
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
1966
57.9
48.9
44.4
41.7
41.4
41.5
39.1
36.6
31.5
33.8
30.7
30.2
26.4
27.0
35.8
41.8
35.0
31.6
23.0
32.4
37.3
41.5
44.0
46.4
60.9
63.4
68.5
66.2
69.3
69.8
73.6
73.0
64.2
58.2
65.0
68.4
Services
19.1
18.7
18.3
16.9
14.5
12.1
Xerox
Percentage
Sales Rentals
45.9
41.2
40.1
37.9
34.2
31.3
26.9
22.8
20.0
20.1
19.1
20.1
20.3
21.8
26.2
21.8
N.A.
N.A.
39.1
47.0
51.0
Services
62.1
65.8
68.7
73.1
77.2
80.0
79.9
80.9
79.9
79.7
78.2
73.8
78.2
N.A.
N.A.
15.1
11.8
8.9
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745
thetheory.First,andperhaps
valueofthisevidencein confirming
theoryhas arpricediscrimination
mostimportant,
conventional
gued that sometimesa rentalcontractwill enable a monopolist
to-meterconsumersand chargemoreto heavy users. There is
the price disproblemin distinguishing
thus an identification
crimination
and durablegoodstheoriesofsales versusrentals.
Second,while Xerox'smarketshare has declineddramaticompetition,
the
cally since 1970, and it is clearlyfacingstiffer
situationwithIBM is muchless clear.IBM's old line competitors
such as Burroughs,Univac,NCR, ControlData, and Honeywell
do not seem to have made greatstridesin recentyears.On the
whoprovidethe
otherhand,the plug compatiblemanufacturers
closestsubstitutesforIBM productshave growndramaticallyin
thepastdecade.Therefore,
it is noteasytosay whetherIBM faces
nowthan it did in the past.26
stiffer
competition
Third,neithersales norrentalcontractsmaybe as simpleas
in thismodel.For example,long-term
bindingrentalagreements
are economicallysimilarto sales, whereassales contractsthat
givethepurchasertherighttosell backthemachinetothemanuthe
Therefore,
likerentalcontracts.
facturer
maybe economically
financialformofplacementcontractsmayhave deceivingimplicationsabouteconomicsubstance.27
Fourth,the firms'productmixeshave changedsince 1970,
forIBM,may
and somenewproducts,
suchas personalcomputers
lendthemselvesmorereadilyto sales ratherthan rentals.
Fifth,1981 changesin UnitedStatestax law have decreased
leasing.The tax advantageto
thetax incentiveformanufacturer
suchleasingcan be summarizedby the followingexample:suppose that IBM builds a computerat a costof $600,000and can
leasing firmor else
eithersell it for$1 millionto a competitive
lease it to customersdirectly.If all partiesare in the same tax
bracket,thetax costofIBM sellingtheasset ratherthanleasing
less theincremental
it is thetax on an immediate$400,000profit,
investment
tax creditand the presentvalue ofthe incremental
depreciationdeductionscreatedby the asset havinga tax basis
of $1 millioninstead of $600,000. Under the AcceleratedCost
RecoverySystem(ACRS) the presentvalue of depreciationdethanin
competition
26. Fisheret al. [1983]arguethatIBM doesfacestiffer
powereven in the
thepast. Theyalso argue thatit had virtuallyno monopoly
earlypartofmysampleperiod.
27. Thatmanypurchasersmaybe leasingcompanieswhorentequipmentis
however.For thepurposesofthispaper'sanalysis,so longas the
not a problem,
itselfdoes not maintaina directinterestin the marketvalue of a
monopolist
theplacementqualifiesas a sale.
machineafterits initialplacement,
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746
747
748
tionin an enlightening
way,meansthatfurther
advancesin this
fieldwill necessarilyrequiremodelsthatare morecomplexthan
thisone.
Theseissuesmeanthatplannedobsolescence
is stilla difficult
and poorlyunderstoodtopic.It is my hope,however,that the
simpleanalysisofthispaperand its emphasison the sequential
natureofthis problemwill help providethe basic intuitionfor
approachingfutureresearchin thisarea.
STANFORD UNIVERSITY
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