Durable Goods Theory For Real World Markets
Journal of Economic Perspectives—Volume 17, Number 1—Winter 2003—Pages 131–154
Durable Goods Theory for Real World
Markets
Michael Waldman
D
urable goods constitute an important part of economic production.
In 2000, personal consumption expenditures on durables exceeded
$800 billion. In the manufacturing sector in the United States in the year
2000, durable goods production constituted roughly 60 percent of aggregate production. Durable goods pose a number of questions for microeconomic analysis. One set of questions involves durability choice and the related issue of “planned obsolescence.” For example, do firms have an incentive to reduce durability below the efficient level so that units break down quickly? Also, to what extent do firms have an incentive to introduce new products that make old units obsolete? A second set of questions revolves around timing issues. How are current prices and marketing strategies affected by a producer’s actions tomorrow that affect the future value of units the producer sells today? A third set of issues revolves around information asymmetry. In many durable goods markets, buyers are unable to judge the quality of durable units offered for sale. As a result, the problem of adverse selection can arise, where sellers withdraw high-quality units from the market because consumers are unable to perceive high quality and are thus unwilling to pay a high price for it.
The early 1970s witnessed three major advances in the microeconomic theory of durable goods. Oddly enough, one of these was mainly followed up in the 1970s, one was largely pursued in the 1980s, and the other was investigated only in the
1990s. In a series of papers in the early 1970s, Peter Swan considered the question of optimal durability (Swan, 1970, 1971; Sieper and Swan, 1973). Most of the work
y Michael Waldman is the Charles H. Dyson Professor in Management and Professor of
Economics, Johnson Graduate School of Management, Cornell University, Ithaca, New York.
Durable Goods Theory for Real World
Markets
Michael Waldman
D
urable goods constitute an important part of economic production.
In 2000, personal consumption expenditures on durables exceeded
$800 billion. In the manufacturing sector in the United States in the year
2000, durable goods production constituted roughly 60 percent of aggregate production. Durable goods pose a number of questions for microeconomic analysis. One set of questions involves durability choice and the related issue of “planned obsolescence.” For example, do firms have an incentive to reduce durability below the efficient level so that units break down quickly? Also, to what extent do firms have an incentive to introduce new products that make old units obsolete? A second set of questions revolves around timing issues. How are current prices and marketing strategies affected by a producer’s actions tomorrow that affect the future value of units the producer sells today? A third set of issues revolves around information asymmetry. In many durable goods markets, buyers are unable to judge the quality of durable units offered for sale. As a result, the problem of adverse selection can arise, where sellers withdraw high-quality units from the market because consumers are unable to perceive high quality and are thus unwilling to pay a high price for it.
The early 1970s witnessed three major advances in the microeconomic theory of durable goods. Oddly enough, one of these was mainly followed up in the 1970s, one was largely pursued in the 1980s, and the other was investigated only in the
1990s. In a series of papers in the early 1970s, Peter Swan considered the question of optimal durability (Swan, 1970, 1971; Sieper and Swan, 1973). Most of the work
y Michael Waldman is the Charles H. Dyson Professor in Management and Professor of
Economics, Johnson Graduate School of Management, Cornell University, Ithaca, New York.
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