Vous êtes sur la page 1sur 22

An Economic Theory of Planned Obsolescence

Author(s): Jeremy Bulow


Source: The Quarterly Journal of Economics, Vol. 101, No. 4 (Nov., 1986), pp. 729-750
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/1884176
Accessed: 12-11-2015 21:32 UTC

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://www.jstor.org/page/
info/about/policies/terms.jsp
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content
in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship.
For more information about JSTOR, please contact support@jstor.org.

Oxford University Press is collaborating with JSTOR to digitize, preserve and extend access to The Quarterly Journal of
Economics.

http://www.jstor.org

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

AN ECONOMIC THEORY OF PLANNED OBSOLESCENCE


JEREMYBULOW
ofgoodswithuneconomically
short
is theproduction
"PlannedObsolescence"
usefullives so that customerswill have to make repeatpurchases.However,
will pay foronlythepresentvalue ofthefutureservicesofa
rationalcustomers
seeminglyimpliesproducingany given
profitmaximization
product.Therefore,
useful
involvingefficient
flowofservicesas cheaplyas possible,withproduction
and therefore
incorrect.
lives.This papershowswhythisanalysisis incomplete
shortusefullivesfortheirgoods.
Monopolists
are showntodesireuneconomically
incentiveforshortlives as well as a second
Oligopolistshave the monopolist's
However,
incentivethatmayeitherincreaseor decreasetheirchosendurability.
oligopolistscan generallygain by colludingto reducedurabilityand increase
rentalsrelativeto sales. Someevidenceis presentedthatappearstobe generally
ofthetheory.
withthepredictions
consistent

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.

*Thanksto Paul Klemperer,Paul Pfleiderer,


JohnRoberts,MyronScholes,
and LarrySummersforvaluable comments.
Thanksalso to the participants
in
seminarsat Chicago,Columbia,Michigan,MIT, Princeton,Stanford,
and Wisconsin.This paper was begun at StanfordBusiness School and revisedat the
CenterfortheStudyoftheEconomyand theState,University
ofChicago.I am
gratefulto GeorgeStiglerforarrangingmyvisitthere.
1. See, e.g.,Galbraith[1958,p. 352] discussingthewastefulness
ofchanging
automobile
models.Probablythebestknownempiricalworkinthisarea is Fisher,
Griliches,and Kaysen[1962].
2. Martin[1962],Kleimanand Ophir[1966],Levhariand Srinivasan[1969],
andSchmalensee[1970]all concludedthatmonopolists
wouldchooseinefficiently
shortassetlives,butdidso via flawedanalyses.Barro[1972]reliedon consumers
and producers
facingdifferent
discountratesto deriveplannedobsolescence.
3. See Swan [1972,1977]and Sieperand Swan [1973]fora detailedpresentationofthisargument.These papersalso showedthe errorsmade by the first
severalauthorscitedin footnote
2. For a goodsurveyofthedurability
literature
until1980,see Schmalensee[1979].
? 1986bythePresident
andFellowsofHarvardCollege.PublishedbyJohnWiley& Sons,Inc.
The QuarterlyJournal ofEconomics, November 1986

CCC 0033-5533/86/040729-21$04.00

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

730

QUARTERLY JOURNAL OF ECONOMICS

This paper explainswhy,in a fullinformation


model4with
rationalcustomers,
a firmmightoptto giveitsproductsa shorter
thaneconomically
desirableusefullife.Sometimes
firmsmayeven
pay moreto producea shorterlivedasset. The keyresultsofthe
paperfollow:
1. Exceptunderunusual cost conditions5
a monopolistnot
threatenedby entrywill producegoodswithinefficiently
short
usefullives. This resultis closelylinkedto the observationthat
a durablegoodsmonopolistwill preferto rent,ratherthan sell
its output.6
2. An oligopolist,
or equivalentlya monopolist
facingcertain
entryin a subsequentperiod,also has a countervailing
incentive
to extenddurability.
As a corollary,
suchfirmshave an incentive
to steercustomersto purchaseratherthanrentalcontracts.
This
sameresultalso holdsiffuturecompetition
is tobe overa related
butnotidenticalsubstitute
whilemonopolists
product.Therefore,
willoptforinefficiently
shortusefullives,oligopolists
maychoose
eitheruneconomically
shortorlonglives,dependingontheirtechnologiesand marketconditions.There is also an incentiveto
increasedurabilityto deterentry.7
3. Thereis generallyan incentiveforoligopoliststo collude
to reducedurability,
belownoncooperative
levels.
4. Whileantitrustpolicyrequiringfirmsto sell ratherthan
renttheirproductswill reduceprofitability
and any monopoly
power,it mayalso decreasewelfare.
In SectionII the basic modelofa monopolistchoosinga durabilityis developed.Whilecompetitive
firmswill choosethe ef4. We meanto ruleout equilibriawheredurability
is unobservable
priorto
purchase,firmshave a costincentiveto produceshoddyproducts,
and customers
therefore
assumethatlow-durability
productswillbe produced.
5. Specifically,
a firm'smarginalcostcurvehavinga steeperslopethanits
demandcurvearoundequilibrium.
6. See Bulow[1982]foran expositionon the advantagesofrentingforsuch
a monopolist.
The link is thatby rentingthe monopolist
is sellingoffthe nondurableservicesofhis productsand maythusachievemanyoftheadvantagesof
lowdurability
without
thecostsofinefficient
production.
However,therearemany
durableproductmarketswhererentalmarketshave theirown inefficiencies.
Consider,
forexample,theincentiveproblems
in automobilerental.A goodpaper
discussingthelease versusbuyquestionin a competitive
environment
is Wolfson
[1985].
7. Thereis an extensiveliteratureon increasingthedurability
ofinvestment
assetsto deterentry.The analogouspointon thedemandsideis thatentryis less
profitable
ifcustomers
are tiedto long-term
contracts
or alreadyownassetswith
longlives.

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

A THEORY OF PLANNED OBSOLESCENCE

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.

II. MONOPOLY AND PLANNED OBSOLESCENCE

We begin by consideringa monopolistwho is maximizing


profits
overtwoperiods.In thefirstperiodit choosesbotha quantityq1 and a durabilityB. Of the initial q1 unitssold,(1 - 8)ql
disappearat the end ofthe firstperiodand 8q1remainin period
2. The firmmay also producean additionalq2 unitsin period2.
The implicitrentalpriceof a unit in period1 is f1(qj) and the
implicitrentalpricein period2 is (1 + r)(f2(8q1+ q2)),wherer
is theinterestrate.Totalcostsin period1 are Cj(qj,8), and period
2 costsare (1 + r)C2(q2).The presentvalue ofsecond-period
revenues is thusf2(8q1 + q2), and the presentvalue ofsecond-period
costsis C2(q2).The firmis requiredto sell, ratherthenrent,its
This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

QUARTERLY JOURNAL OF ECONOMICS

732

output.8Finally,we assume a perfectsecond-handmarket:any


purchaserofoneunitcan resellhis remaining8 units
first-period
in the secondperiodat the marketpriceofnew output.9
The problemofthe monopolistis to
max iT = qlf(ql) + (8q1 + q2)f2(8q1+ q2)

(1)

ql,q2,8

- Cl(ql,8) - C2(q2),

wherethe firsttwo termsrepresentthe presentvalue of total


revenuesand the last two termsare the presentvalue oftotal
costs.
firstthe monopolistfacesthe following
Leftunconstrained,
orderconditions:
al7T

(2)

aq,

(3)
(4)

Aac1

=f+

qif,+

8f2 + (8qi + q2)8f2-

al7T

= f2 + (8q1
~ ~
aq2~

= qlf2 + (8ql

+ q2)f2 - C2 =

aq,

=0

~~~C

+ q2)qlf2

d_

0.

Combiningthe last twoconditionsyields


(5)

1 aC1
-,8-=

C2.

duraCondition(5) statesthat the firmwill choosean efficient


more
a
little
units
of
its
original
it
the
cost
making
bility: equates
durableso thatone moreofthe originalunitswill stillbe useful
in thesecondperiod,((11qj)(aCj1h8)),withthepresentvalue ofthe
8. We also ruleoutthemonopolist's
thatplace
engagingin financialcontracts
himin the equivalentpositionofa renter.The simplestsuchcontractwouldbe
onetorepurchaseall solditemsat a fixedpriceat theendofoneperiod.Anderson
[1984]suggestsfuturescontracts
wherethemonopolist,
byholdingfutures,
could
internalize
changesin thegenerallevelofpriceswhilemakingindividualowners
responsibleforchangesin specificasset values due to differing
levels ofmaintenance.One difficulty
withsuch a contractis that it may be difficult
forthe
monopolist
to makeits netfuturesmarketpositionpubliclyobservable.
9. This assumption
has severalimplications.
Combinedwiththeassumption
ofa downwardslopingdemandcurve,it impliesthatfirst-period
consumersare
made worseoffby increasedsecond-period
production.
Note that sometimesa
monopolist
maywishto deterthesecond-hand
market;considera firmthatoffers
tiedservicecontracts
tocustomers
whichare onlyvalidfortheoriginalpurchaser
ofa good.Imperfections
in the second-hand
markethave the effectofreducing
theeconomicdurability
ofa product(see Bulow[1982]).
This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

A THEORY OF PLANNED OBSOLESCENCE

733

costofreplacingan extraunitin the secondperiod,(C2). This is


the conclusionofSwan [1972]:forany givenflowofservicesthe
choosesto produce,profitmaximizationimpliesthat
monopolist
theseservicesbe producedas cheaplyas possible.
However,this analysis is incompleteand consequentlyincorrect.The problemofthe durablegoodsmonopolist
is thatthe
unconstrained
solutionto (1) is generallynot dynamicallyconsistent.10
When the secondperiodarrives,the monopolistwill
regardthe firstperiodas waterunderthe bridge.It thenfaces
theproblem,
max

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.
This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

734

QUARTERLY JOURNAL OF ECONOMICS

deterthatdq2Idiql is implicitly
and recognizing
culatingdiT/d8
leads to the followingconditionon duminedby the constraint,
rability:

1 a

(7)

C' +

8qlf2'

d(iq1 + q2)

The intuitionbehindthe last termin (7) is as follows:becauseof


the constraintthe monopolistsuffersa loss of8qlf2 on the marginal unit it sells in the secondperiod,relativeto its precomoutput.The term8qlf2 is simplythe
mitmentin the first-period
between(3) and (6). When iq1is increasedbyone unit
difference
due to increaseddurability,the choiceofq2 is changedby dq2I
(6). On net,
diq1, whichcan be foundby totallydifferentiating
in the secondperiodchangesby
thenumberofunitsoutstanding
d(8q1 + q2)Id~q1,whichas we will see belowis usuallypositive.
Increasingdurabilitythus has the extra cost in this modelof
increasingtheunitsonthemarketin thesecondperiod,and those
extraunitsreduceprofits.There is thus an incentiveto reduce
level.
durabilitybelowthe efficient
(6), we findthat
By totallydifferentiating
d(8q1 + 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 -

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

A THEORY OF PLANNED OBSOLESCENCE

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,

the negative of the slope of the

demandcurve.Marginalcostschangeby -QC, the negativeofthe slopeofthe


marginalcostcurve.Fromtheinitialoptimum
whereMR = MC, ifthemarginal
costcurveis steeperthanthedemandcurve,thenincreasing8q, and decreasing
q2 bya like amountwill thusleave marginalrevenuebelowmarginalcosts.So,
toreturntoMR = MC,q2 willhavetobe decreasedbymorethan8qi is increased.
ifmarginalcostsare sharplydecreasing,
Therefore,
an increasein durability
from
theeconomically
efficient
level will cause a decreasein 8q, + q2 and thuscause
an increasein profits.
13.Thisrestriction
on marginalcostsis fairlyweak.It is worthemphasizing
thata firm
ofscaleinthesecondperiod(average
couldhaveconsiderable
economies
costsdecreasingwithoutput)withouthavingrapidlydecreasingmarginalcosts.
wouldprefera less
14. Thereare also sometax reasonswhya monopolist
themonopolist
durableproduct.By sellinga durableproduct,
immediately
pays
rentsearnedon theunitssold.
taxeson thepresentvalue ofthefuturemonopoly
those
from
taxesmustbe paid on anyincomeearned
Further,
reinvesting
profits.
services
Withnondurableunits,taxesare paid onlyat thetimethemonopolist's
are consumed.

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

736

QUARTERLY JOURNAL OF ECONOMICS

cationsofthemodeland oftencausestheresultstobe understated.


The reasonis that a considerableamountofcommitment
is alreadyimpliedwhena firmthatproducesin period1 cannotproduceagain untilhalfthe timehorizonhas elapsed.Withshorter
periodsthe need to "buy"commitment
via plannedobsolescence
and otherdevicescan increase.
A finalnoteconcernsthe welfareimplicationsofthismodel.
The perfectness
constraint(6) reducesthe monopolist'sprofits;
thatpointis one ofthe majorthrustsofthe durablegoodsmonopolistliterature.But the constraintalso causes inefficiencies
inproduction,
suchas plannedobsolescence.It is entirelypossible
thatthe constrainedmonopolist,
while makinglow profits,
will
reducediscountedconsumersurplusrelativeto an unconstrained
monopolist.15
A simplenumericalexamplein the nextfootnote
showshow the reductionin monopolypowercumplannedobsolescencecan be welfarereducing.16
Thus,forexample,antitrust
policyrequiringfirmssuchas IBM and UnitedShoe to sell rather
than onlyrentequipmentmaywell be sociallycostlyeven as it
reducesmonopolypower.
The implicationof small profitsand large welfarelosses is
similarto the resultsoftextbookmonopolistic
competition.
Because we knowthatin aggregatefirms'monopoly
are relaprofits
forjustifying
tivelysmall,17resultslike theseare important
the
substantialresearchin imperfect
competition.
15. Bulow[1982,pp. 327-28] showsthata constrained
monopolist
maybuild
artificially
low capacityas a way ofcommitting
to a highfutureprice,and this
in itselfcan lead to a reductionin discountedconsumersurplusrelativeto the
unconstrained
monopolist.
Whilethepointtherewas madein an infinite
horizon
model,it is easyto construct
two-period
exampleswherethesameresultapplies:
=
assumethata firmfacesa demandcurveofp 100 q foreach oftwoperiods
and the interestrate is zero.Capacitycostsare $20 per unit,and one unitof
capacityenablesa firmto buildone unitofoutputeach periodat zeromarginal
cost.A monopolist
unitsofcapacity,and produceforty
renterwill buildforty
in
will be 4,100,and consumer's
period1 and tenin period2. Total profits
surplus
willbe 2,050.A monopolist
sellerwillchoosetobuildtwenty-eight
unitsofcapacity
in period1, and producetwenty-eight
unitsin bothperiods.His profits
willsum
to 3,920,and consumer'ssurpluswill be 1,960.Thus,the limitationon the monopolist'spowerreducesbothprofits
and consumer's
surplus.
16. Assumethattheinversedemandcurveforrentalservicesin each oftwo
periodsis p = 100 - q. The interestrate is zero.First-period
unitscost20 each
to build,regardlessoftheirdurability.
Second-period
unitscost10 to produce.A
monopolist
unitsin period1 withmaximumdurarenterwouldbuildforty-five
bility(8 = 1) and rentthemout each period.Producer'ssurplus(grossoffixed
costs)wouldbe 4,050,and consumer's
surpluswouldbe 2,025fora totalof6,075.
A monopolist
seller,by contrast,wouldproducefortyunitsin period1 witha
8 = A.He wouldadd thirty-five
durability
newunitsin period2, leavinga total
offifty-five
in themarketin thesecondperiod.Simplearithmetic
showsthattotal
profits
dropto 3,725,consumer'ssurplusrises to 2,3122,and thustotalsurplus
fallsto 6,0372.
17. See, forexample,Salinger[1984].

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

737

A THEORY OF PLANNED OBSOLESCENCE

III. THE OLIGOPOLISTICMAXIMIZATION


PROBLEM

This sectionbeginsby outliningan oligopolist'sproblemfor


Cournotquantitycompetition.
The formulafordurability
has one
extratermcomparedwiththe monopolist's
formula,relatingto
theeffect
ofone'sdurabilityon competitors'
second-period
output.
Withquantitycompetition
willusuallycause
a higherdurability
to cut output,and this increasesone's own profitacompetitors
bility.Therefore,
thereis an advantageto high durabilitythat
the oligopolistmusttrade offwiththe competingadvantageof
fasterobsolescence.18

We beginby consideringan oligopolistwhochoosesq1 and 8


in thefirstperiodand q2 in the secondperiod.It facesn competitorswho will producea total of-q witha durabilityof8 in the
firstperiodand will produceq2(8q1) in the secondperiod,where
q2 = En q2 and qc is the secondperiodoutputofthe Cth competitor.The firm's
maximization
problem,
notmuchdifferent
from
(1), is

(9)

max q1fl(q1+ q1) + (8q1 + q2)f2(8q1 +

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,

where the firstconstraintis the perfectionconstraintimposed on

theoligopolist,
and thefinaln constraints
recognizethatin choosing8q1the oligopolistis also implicitly
choosinghis competitor's

second-periodoutputs and that his choice in competitors'outputs


is limited by the Nash requirementthat each of those firmswill
have MR = MC.

Durabilitychoicecan be derivedjust as in themonopoly


case:

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!

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

738

QUARTERLY JOURNAL OF ECONOMICS

All the termsin (10) shouldbe familiarfromthe monopoly


case exceptthelastone.It statesthatwhendurability
is increased
so thatthe amountofoutputthatlasts intothe nextperiod,8q1,
increasesbyone,thatcompetitors'
second-period
outputis changed
thepricethefirmreceivesfor
and thischangeaffects
bycdq2Idiql
the8q1 + q2 unitsofservicesthatits outputprovidesduringthe
secondperiod.If,forexample,an increasein 8q1causes competitorsto reducesecond-period
output,thenthe finaltermin (10)
willbe positiveand will act to increasedurability,
thusactingin
thedirection
oppositefromtheprevioustermin therelation.Note
thatifa firmacts as a pricetaker,(10) showsthatit choosesthe
efficient
durability.
A sufficient
conditionforthe last termin (10) to be positive
and act to increasedurabilityofa firm,say firmA, is thateach
ofA's competitors'
second-period
marginalrevenueis decreasing
in industry
output.Thenan increasein A's durability,
whichhas
the same effect
ofincreasingsecond-period
industryoutput,will
causeall competitors
tocontract
outputandthushelpA's profits.19

IV. ILLUSTRATIONS OF THE PROBLEMS OF DURABILITY CHOICE

The analysis ofSectionsII and III showsthat the determinantsofdurability


choiceextendbeyondefficiency
considerations.
This sectionisolates these nonefficiency
considerations
by pro-

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].
This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

A THEORY OF PLANNED OBSOLESCENCE

739

vidingillustrationsof durabilitychoicein exampleswhereall


durabilitiesare equal in productiveefficiency.
The assumptionthat all durabilitiesare of equal efficiency
in productionis of special interestforits applicationto how a
manufacturer
whocouldeitherrentorsell itsoutputswouldchoose
sales as a percentageoftotalplacements.By decreasingits salesrentalratio,a firmis able to reducethe amountoffutureoutput
servicesownedby customerswithoutany loss ofproductiveefficiency.The analogyofrental-salesstrategyto durabilitychoice
is further
detailedin SectionV.
Both examplesbelow involvequantitycompetition
so that
firms
facingpotentialoractualcompetition
willhave an incentive
to chooselongerdurabilitiesthan a monopolist(see SectionIII).
The firstexampleillustratesa monopolistwho expectscompetitionin the secondperiod.It uses durabilityas a way to become,
a Stackelbergleaderin the secondperiod.The second
effectively,
exampleillustratesquantitycompetition
betweensymmetrical
firms.The optimaldurabilitychoiceis derivedas a functionof
the numberoffirmsin the market,withthe monopolist's
choice
of 8 = 0 being the result forn = 1.
The intuitionofthe examplesprovidesthe basis fora short
discussionon issues ofentryand collusion.Finally,the problem
ofa firmplanningto introducea newbutrelatedproductand its
strategyin choosingdurabilityand a sales versusrentalstrategy
is analyzed.
Example1: The Monopolist
Facing Second-PeriodEntry
In theseexampleswe shall assumethatfirmshavea constant
marginalcosttechnology
thatallowsthemto produceunitswith
a durabilityof8 at a costofC(1 + 8). In the secondperiodthey
can produceunitslastingone periodat a constantmarginalcost
of(1 + r)C. Withthistechnology
producingat all durabilitiesis
equallyefficient.
That is, thepresentvalue oftotalcostsis equal
to q1C + (8q1 + q2)C regardlessof whetherthe firmchoosesto
supplysecond-period
demandwithhighdurabilityand low q2 or
low durabilityand highq2.
In this firstexampleassume that a first-period
monopolist
choosesq1 and &. In the secondperiodthe incumbentand an
entrantestablisha Cournotequilibriumover the residual demand. The demand curve for rental services is p = (x - 3qj in
period1 and p = (1 + r)(ot- p8q, - Pq2 - 3q2) in period2.
Because the second-periodCournot equilibriumis q2=
This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

740

QUARTERLY JOURNAL OF ECONOMICS

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.

(Because ofthe symmetry


in the positionofthe incumbent
andtheentrantin choosingsecond-period
output,themonopolist's
perfection
constraint
ofsecond-period
MR = MC (a - 8 -q1-q2

- 23q2 - c = 0) and the Nash equilibrium requirementforthe


competitor'ssecond-periodoutput ((x - p8q, - 3q2 - 2I3q2 - C
-

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.

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

741

A THEORY OF PLANNED OBSOLESCENCE

durabilityof8 in period1 and thata Cournot-Nash


equilibrium
willbe establishedon residualdemandin the secondperiod.The
firm'sproblemis to
(12)
max q1(o - 3q1 - J3(n+

- C) + (8q, +

ql,8

i(n - 1)41 +

q2 +

(n

q2)(O

1)q2)

(8

C)

subjectto
q2 =

q2 =

(ot -

3(8qq + (n - 1)8q,) - C)l4(n + 1),

wherethe constraintis again impliedbythe second-period


equilibrium.As with(11) symmetry
enablesus to combinethe firm's
perfection
on its ownoutputwiththeconstraints
constraints
that
it is limitedin its implicitchoiceof competitor's
second-period
outputto theirmeetingthe Nash equilibriumconditions.It is
easy to solve (12) fora symmetrical
equilibrium:
ot - C

=(n + 1)'
=

(ot - C)(n -1)


+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.

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

QUARTERLY JOURNAL OF ECONOMICS

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

1)]. Then if 8 is fixed,

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.

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

A THEORY OF PLANNED OBSOLESCENCE

743

V. SALES VERSUS RENTALS

Finally,we considerhowa firmthathas the choicebetween


sellingand rentingitsoutputshouldbalanceitsplacements.
Again
a simplemodification
ofthe two illustrativeexamplesis ofuse.
Assumethatall unitsproducedin thefirstperiodlast twoperiods
and cost2C to produce.Unitsbuiltin the secondperiodlast one
periodand cost(1 + r)C to produce.The firmsmustchoosefirstperiodoutputs,and decidewhatfractionofthoseunitsshouldbe
sold and what fractionrented.Then firmswill chooseq1just as
in the examplesand choosea sales percentagejust as theychose
8 in theoriginalexamples.24
That is,in Example1 themonopolist
will sell halfits outputand renthalf.In Example 2, each oligopolistwill sell (n2 - 1)I(n2+ 1) of its first-period
output.The
reasonforthe close analogybetweena rental-salesratio and a
depreciationrate is that whena firmsells 8 unitswitha lifeof
twoperiodsand rents(1 - 8) units,it essentiallysellingoneunit
of outputforthe currentperiodand 8 units forthe following
period,just as ifit sold a depreciatingasset. The sole difference
is thattheproduction
and rentalofdurablesgivesa firmmarginal
rentals
costsofzeroin thesecondperioduntilall ofthefirst-period
are disposedof. Because examples 1 and 2 give firmsconstant
marginalcostsand firmsalways distributemoreunitsin period
2 thantheyrentedin period1, thisdifference
does notaffectthe
equilibriumin thoseexamples.25
The analogyofrental-salesstrategiesto durabilityenables
one to make predictionsabout the evolutionof a firm'srentalit faceschanges.A mosales ratio as the degreeofcompetition
24. Thisexactequivalencewouldnotholdin otherexampleswheretheequilibriumnumberofunitson themarketin the secondperiodwouldbe less than
demandwas
the numberin the firstperiod,forexamplebecause second-period
demand.
weakerthanfirst-period
= d2C21aq2= Oso thatmarginalcosts
25.Moreformally,
assumethatd2Ci/dql
are constanteach periodand
1 aC2 aC2
dq2
q, a8
so thatthereare no economiesor diseconomies
associatedwitha changein durabilitychoice.Then the costs in the oligopolisticmaximizationproblem(9),
C1(8,q1)+ C2(q2),can be rewritten
as C(q1,8q1+ q2). In thatcase the maximizationproblemis preciselythe same fora firmthatfacesan exogenous8 and
choosesa sales-rentalratioand one thatcan choose8 but can onlysell, as long
as we have an interiorsolution(no unitsare rentedin the firstperiodand left
idle in thesecond).The generalinterpretation
of8 wouldbe thefraction
offirstperiodplacementsthatare bothserviceablein the secondperiodand ownedby
customers.
This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

744

QUARTERLY JOURNAL OF ECONOMICS

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

N.A. = not available.


Source. 10-K Reports filedby IBM and Xerox with Securities and Exchange Commission,various years.

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

A THEORY OF PLANNED OBSOLESCENCE

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,

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

746

QUARTERLY JOURNAL OF ECONOMICS

ductionshas been dramaticallyincreasedto the pointwherethe


tax advantageto manufacturer
leasinghas been virtuallyeliminated.This changein the tax laws has probablyaffected
firms'
sales-rentalpolicies.28
Nevertheless,
analysisin thebusinesspresshas arguedthat
IBM's recentpolicyof increasingsales versusrentalshas been
implemented
becauseofcompetitive
considerations.
TheIBM Credit
Corp.was establishedtwo years ago to facilitateits customers'
outright
purchaseofmachinery,
alteringthecompany's
historical
policyofencouragingcustomersto lease ratherthanbuyits machines.As a resultthefraction
ofcompanyrevenuesderivedfrom
rentalshas droppedby overa thirdin twoyears.29"Moreimportant,thetrendto customers'purchasingmoreoftheirequipment
freesthe companyto introducemachinesmorefrequently-alethal competitive
edge."30
VI. CONCLUSION

Monopolistsgenerallyhave an incentiveto producegoods


withinefficiently
shortusefullives.Thereare onlyminorexceptionsto thisrule. The reasonforthis rule derivesfromthe perfectionconstraintofthe durablegoodsmonopolist,
whichforces
himin thelongrunto chargelowerpricesthanwouldan unconstrainedfirm.By reducingthe durabilityofits output,the monopolistcan reducethe costofits perfection
constraint.
An oligopolist,or a monopolistfacingfutureentry,has the
same considerations
as the monopolistplus the extraconsiderationofhowitsdurability
willeffect
competitors'
futurestrategies.
If the firmfacesCournot-Nashcompetition,
it will usually find
thatincreaseddurabilitywill reducecompetitors'
futureoutput.
Sincea reductionin competitors'
outputwill,all else equal, raise
a firm'sprofits,
sucholigopolistshave a countervailing
incentive
to increasedurabilityand maychooseeitherexcessivelylongor
shortlives fortheirproducts.
28. For a lucid summaryof these issues see Miller and Upton[19761.Of
course,the 1981 tax law also createdincentivesforsome firms,mostnotably
Boeing,to lease ratherthansell. The reasonis thatwhenequipmentsuchas an
airlinerwas transferred
abroadbutusedpartiallyin theUnitedStates,the1981
law allowedthe lessor a 10 percentinvestment
tax creditand an accelerated
depreciation
writeoff.
See Merry[1983].This tax advantagehas sincebeeneliminated.
29. See Table I.
30. See AndrewPopper,"HowtheIBM Juggernaut
WillKeep Rolling,"
BusinessWeek,July16, 1984,p. 106.
This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

A THEORY OF PLANNED OBSOLESCENCE

747

If a firmwishesto deterentryintoits markets,thenit will


orequivalentlyitwillhavea preference
longerdurabilities,
prefer
to sell ratherthan rentmoreofits output.On the otherhand,if
prodoftheindustry's
can colludeto setthedurability
oligopolists
policy
Antitrust
ucts,theywilloptforsomeplannedobsolescence.
to sell ratherthan rent
thatrequiresdurablegoodsmonopolists
butmayalso reduce
theirproductswill reducetheirprofitability
welfare.Thus, while such policiesreducemonopolypower,they
will notnecessarilyadd to efficiency.
The movementsofIBM and Xeroxto a greaterrelianceon
greatercomsales ratherthanrentalsas theyhave encountered
ofthis
petitionare looselyconsistentwithsomeofthepredictions
theory.
Perhapsthegreatestweaknessofthispaperis thatit follows
in the traditionofusing durabilityas a proxyforobsolescence.
market
This assumption,combinedwiththeperfectsecond-hand
assumption,permitsthe modelto regardgoodsproducedat diftheanalysis.
and greatlysimplifies
ferenttimesas homogeneous,
But plannedobsolescenceis muchmorethan a matterofduraabouthowoftena firmwill
bility;it is also and perhapsprimarily
introducea new product,and how compatiblethe new product
the
will be witholderversions.In a marketsuch as textbooks,
by
publishers'inabilityto internalizethe capital losses suffered
to make
holdersofused booksseemsto lead to excessiveefforts
withone another;this
succeedingeditionsofa bookincompatible
But in othermarkets,
resultseemsconsistentwithourtheory.31
customersmayvalue their
such as thatforpersonalcomputers,
purchasesmorehighlythe greater theirexpectationsof future
sales. Such marketsare not well accommodatedby the model
presentedhere.However,modelingsuchmarketswillnecessarily
marketassumpoftheperfectsecond-hand
requireabandonment
tion,because withperfectsecond-handmarketsand downward
purchasersmustnecessarily
slopingdemandcurvesfirst-period
sales. The inabilityofcustomers
lose by increasedsecond-period
to resell will introduceconsiderationsakin to those of convenintothe analysis.This complication,
tionalpricediscrimination
in allowingforproductdifferentiacombinedwiththe difficulty
law studentsaskingif
31. JohnKaplan tellsthestoryofone ofhis Stanford
in his course.The
he couldgetbywiththepreviouseditionofKaplan's textbook
tothestudent,"Ifan intelligent
personis revisinghis textbook,
authorresponded
doyouthinkhe's goingtoredoit in sucha waythatyoucan use theoldversion?"
This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

748

QUARTERLY JOURNAL OF ECONOMICS

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

REFERENCES
Anderson,
RonaldW., "MarketPowerand FuturesTradingforDurableGoods,"
DepartmentofEconomics,CityUniversity
ofNew York,GraduateCenter,
May 1984.
Barro,RobertJ., "Monopolyand ContrivedDepreciation,"
JournalofPolitical
Economy,
LXXX,(May/June
1972),598-602.
Bulow,JeremyI., "DurableGoodsMonopolists,"
JournalofPoliticalEconomy,
XC (April1982),314-32.
Bulow,JeremyI., JohnD. Geanakoplos,and Paul D. Klemperer,
"Multimarket
Oligopoly:
StrategicSubstitutes
andComplements,"
JournalofPoliticalEconomy,XCIII (June1985),488-511.
Coase, RonaldH., "Durabilityand Monopoly,"
JournalofLaw and Economics,
XV (April1972),143-49.
Conlisk,John,Eitan Gerstner,
andJoelSobel,"CyclicPricingbya DurableGoods
thisJournal,IC (Aug. 1984),489-505.
Monopolist,"
Fisher,FranklinM., Zvi Griliches,and C. Kaysen,"The Costs of Automobile
ModelChangesSince 1949,"JournalofPoliticalEconomy,LXX (Oct. 1962),
433-51.
Fisher,FranklinM.,,John
J.McGowan,andJoanE. Greenwood,
Folded,Spindled
and Mutilated:EconomicAnalysisand U. S. v.IBM (Cambridge,
MA: M.I.T.
Press,1983).
Fudenberg,
Drew,andJeanTirole,"TheFat-CatEffect,
thePuppy-Dog
Ploy,and
theLean and HungryLook,"AmericanEconomicReview,LXX (May 1984),
361-66.
Galbraith,JohnK., TheAffluent
Society(Boston:HoughtonMifflin
Co., 1958).
Gul,Faruk,"DynamicOligopoly,"
PrincetonUniversity,
1985.
andRobertWilson,"Foundations
ofDynamicMonopoly
, HugoSonnenschein,
and theCoase Conjecture,"
Stanford
1985.
University,
Kahn,Charles,"TheDurableGoodsMonopolist
and Consistency
withIncreasing
Costs,"WorkingPaper,University
ofChicago,1982.
Kim,Jae-Cheol,"Monopoly,
Durability,and Expectations,"
of
State University
New Yorkat Buffalo,mimeo,1984.
Kleiman,E., andT. Ophir,"TheDurabilityofGoods,"ReviewofEconomic
Studies,
XXXIII (April1966),165-78.
Kreps,David,and RobertWilson,"Reputation
and Imperfect
Information,"
Journal ofEconomicTheory(Aug. 1982),253-79.
Levhari,David and T. N. Srinivasan,"DurabilityofConsumption
Goods:CompetitionversusMonopoly,"
AmericanEconomicReview,LIX (March1969),
102-107.
Martin,D. D., "Monopoly
Powerand theDurabilityofDurableGoods,"Southern
EconomicJournal,XXVIII (Jan.1962),271-77.
Merry,RobertW., "Boeingand OthersFightMoveby Congressto End Big Tax
Advantageson JetLeasings,"WallStreetJournal,CCII (Oct. 19, 1983),33.

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions

A THEORY OF PLANNED OBSOLESCENCE

749

Miller,MertonH. andCharlesW. Upton,"Leasing,BuyingandtheCostofCapital


Services,"JournalofFinance,XXXI (June1976) 787-98.
and theConcentration-Profits
Salinger,MichaelA., "Tobin'sq's q, Unionization,
Rand JournalofEconomics,XV (Summer1984),159-70.
Relationship,"
Richard,"Regulationand theDurabilityofGoods,"Bell Journalof
Schmalensee,
Science,I (Spring1970),54-64.
EconomicGoodsand Management
and Quality:A SelectiveSurvey,"Economic
Durability,
,"MarketStructure,
Inquiry,XVII (April1979),177-96.
in the Marketfor
Sieper,E., and Peter L. Swan, "Monopolyand Competition
DurableGoods,"ReviewofEconomicStudies,XL (July1973),333-51.
Sobel,Joel,"TheTimingofSales,"ReviewofEconomicStudies,LI (April1984),
353-68.
Stokey,N. L., "RationalExpectationsand Durable GoodsPricing,"Bell Journal
ofEconomics,XII (Spring1981),112-28.
Swan,PeterL., "OptimumDurability,Second-HandMarkets,and PlannedOb1972),575-85.
JournalofPoliticalEconomy,LXXX (May/June
solescence,"
EconoComment,"
, "ProductDurabilityUnderMonopolyand Competition:
XLV (Jan. 1977),229-35.
metrica,
Issues in theAllocationof
MarkA., "Tax,Incentive,and Risk-Sharing
Wolfson,
Problem,"JournalofBusiRights:The GeneralizedLease-or-Buy
Property
ness,LVIII (April1985) 159-72.

This content downloaded from 130.115.76.137 on Thu, 12 Nov 2015 21:32:48 UTC
All use subject to JSTOR Terms and Conditions