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Regulation and the Durability of Goods

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  • Richard L. Schmalensee

Abstract

This paper considers the production of durable goods that deteriorate at a constant percentage rate under conditions of competitive and monopoly equilibrium. A perfect market in used units of the good is assumed, as is constant returns to scale in production. It is shown that a monopolist will generally produce goods that deteriorate faster than those produced by a competitive industry. Regulation of the durability of the monopolist's output will always cause him to increase the volume of services of the good available to the market. Government intervention to limit the monopolist's price-cost margin may cause the firm to increase the deterioration rate of its output, and such regulation may also lead the monopolist to decrease the volume of services of the good available to the market. In this case, regulation will have effects exactly contrary to the presumed intent of the regulators. The impact of price regulation is shown to depend on the shape of the demand curve for the services of the durable good. Finally, it is pointed out that both price and durability must be regulated if a monopolist is to be made to reproduce competitive performance.

Suggested Citation

  • Richard L. Schmalensee, 1970. "Regulation and the Durability of Goods," Bell Journal of Economics, The RAND Corporation, vol. 1(1), pages 54-64, Spring.
    • Handle: RePEc:rje:bellje:v:1:y:1970:i:spring:p:54-64
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    Citations

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    Cited by:

    1. Noel Uri, 2004. "The Impact of Incentive Regulation on Service Quality in Telecommunications in the United States," Quality & Quantity: International Journal of Methodology, Springer, vol. 38(3), pages 291-318, June.
    2. Halil Fidan, 2004. "Quality Level and Price in Turkish Durum Wheat Market," Quality & Quantity: International Journal of Methodology, Springer, vol. 38(3), pages 319-329, June.
    3. Oded Koenigsberg & Rajeev Kohli & Ricardo Montoya, 2011. "The Design of Durable Goods," Marketing Science, INFORMS, vol. 30(1), pages 111-122, 01-02.
    4. Adriano A. Rampini, 2019. "Financing Durable Assets," American Economic Review, American Economic Association, vol. 109(2), pages 664-701, February.
    5. Jayarajan, Dinakar & Siddarth, S. & Silva-Risso, Jorge, 2018. "Cannibalization vs. competition: An empirical study of the impact of product durability on automobile demand," International Journal of Research in Marketing, Elsevier, vol. 35(4), pages 641-660.
    6. Chikako Kajikawa, 1998. "Quality level and price in Japanese apple market," Agribusiness, John Wiley & Sons, Ltd., vol. 14(3), pages 227-234.
    7. Noel Uri, 2003. "Service Quality Effects of Incentive Regulation on Access Service in Telecommunications in the United States," European Journal of Law and Economics, Springer, vol. 16(3), pages 369-390, November.
    8. Peran van Reeven & Enrico Pennings, 2016. "On the relation between multimarket contact and service quality: Mutual forbearance or network coordination?," Strategic Management Journal, Wiley Blackwell, vol. 37(10), pages 2121-2134, October.
    9. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    10. Morton I. Kamien & Nancy L. Schwartz, 1972. "Product Durability Under Monopoly and Competition," Discussion Papers 7, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    11. Morton I. Kamien & Nancy Schwartz, 1975. "Optimal Capital Accumulation and Durable Goods Production," Discussion Papers 141, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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