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A Theory of Economic Obsolescence

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  • In Ho Lee
  • Jonghwa Lee

Abstract

A new generation of durable goods makes an old generation economically, even if not physically, obsolete. Economic obsolescence due to technological innovation requires the durable goods monopolist to implement price discrimination in two dimensions, both between consumers with different valuations and between consumers with different purchase histories. Equilibrium in the game between the durable goods monopolist and consumers depends on the extent of economic obsolescence and the relative sizes of the consumer groups. Underinvestment in innovation may take place. This contrasts with the standard literature on planned obsolescence where the durable goods monopolist overinvests in durability reducing technology.

Suggested Citation

  • In Ho Lee & Jonghwa Lee, 1998. "A Theory of Economic Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 46(3), pages 383-401, September.
    • Handle: RePEc:bla:jindec:v:46:y:1998:i:3:p:383-401
    DOI: 10.1111/1467-6451.00077
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    Cited by:

    1. Avagyan, Vardan & Esteban-Bravo, Mercedes & Vidal-Sanz, Jose M., 2016. "Riding successive product diffusion waves. Building a tsunami via upgrade-rebate programs," International Journal of Research in Marketing, Elsevier, vol. 33(4), pages 780-796.
    2. Eric Brouillat, 2011. "Durability of consumption goods and market competition: an agent-based modelling," Post-Print hal-00780254, HAL.
    3. Il-Horn Hann & Byungwan Koh & Marius F. Niculescu, 2016. "The Double-Edged Sword of Backward Compatibility: The Adoption of Multigenerational Platforms in the Presence of Intergenerational Services," Information Systems Research, INFORMS, vol. 27(1), pages 112-130, March.
    4. Choi, Hyunhong & Koo, Yoonmo, 2023. "New technology product introduction strategy with considerations for consumer-targeted policy intervention and new market entrant," Technological Forecasting and Social Change, Elsevier, vol. 186(PA).
    5. Edward Kutsoati & Jan Zabojnik, 2001. "Durable Goods Monopoly, Learning-by-doing and "Sleeping Patents"," Discussion Papers Series, Department of Economics, Tufts University 0105, Department of Economics, Tufts University.
    6. Eric Brouillat, 2015. "Live fast, die young? Investigating product life spans and obsolescence in an agent-based model," Journal of Evolutionary Economics, Springer, vol. 25(2), pages 447-473, April.
    7. Jong‐Hee Hahn, 2006. "Damaged durable goods," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 121-133, March.
    8. Dennis W. Carlton & Michael Waldman, 2005. "Tying, Upgrades, and Switching Costs in Durable-Goods Markets," NBER Working Papers 11407, National Bureau of Economic Research, Inc.
    9. Heidrun C. Hoppe & In Ho Lee, 2000. "Entry Deterrence in Durable-Goods Monopoly," Econometric Society World Congress 2000 Contributed Papers 0610, Econometric Society.
    10. Michael Waldman, 2004. "Antitrust Perspectives for Durable-Goods Markets," CESifo Working Paper Series 1306, CESifo.
    11. Basak Altan, 2020. "Dynamic Durable Goods Monopoly and Market Power," Games, MDPI, vol. 11(2), pages 1-14, May.
    12. Utaka, Atsuo, 2008. "Pricing strategy, quality signaling, and entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 878-888, July.
    13. Francesco Nava & Pasquale Schiraldi, 2019. "Differentiated Durable Goods Monopoly: A Robust Coase Conjecture," American Economic Review, American Economic Association, vol. 109(5), pages 1930-1968, May.
    14. Evrim Dener, 2011. "Quality uncertainty and time inconsistency in a durable good market," Journal of Economics, Springer, vol. 104(1), pages 1-24, September.
    15. Atsuo Utaka, 2022. "Clearance sales and new product introduction," The Japanese Economic Review, Springer, vol. 73(3), pages 539-554, July.
    16. Franses, Ph.H.B.F. & Hernández-Mireles, C., 2006. "When Should Nintendo Launch its Wii? Insights From a Bivariate Successive Generation Model," ERIM Report Series Research in Management ERS-2006-032-MKT, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    17. Kutsoati, Edward & Zabojnik, Jan, 2005. "The effects of learning-by-doing on product innovation by a durable good monopolist," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 83-108, February.
    18. Qiu_Hong Wang & Kai-Lung Hui, 2005. "Technology Timing and Pricing In the Presence of an Installed Base," Industrial Organization 0512013, University Library of Munich, Germany.
    19. Calvano, Emilio, 2006. "Destructive Creation," SSE/EFI Working Paper Series in Economics and Finance 653, Stockholm School of Economics, revised 30 Dec 2007.
    20. Hoppe, Heidrun C. & Lee, In Ho, 2003. "Entry deterrence and innovation in durable-goods monopoly," European Economic Review, Elsevier, vol. 47(6), pages 1011-1036, December.
    21. Qiu-Hong Wang & Kai-Lung Hui, 2017. "Technology Mergers and Acquisitions in the Presence of an Installed Base: A Strategic Analysis," Information Systems Research, INFORMS, vol. 28(1), pages 46-63, March.
    22. Dinesh Kumar, U. & Saranga, Haritha, 2010. "Optimal selection of obsolescence mitigation strategies using a restless bandit model," European Journal of Operational Research, Elsevier, vol. 200(1), pages 170-180, January.
    23. Chao Liang & Metin Çakanyıldırım & Suresh P. Sethi, 2014. "Analysis of Product Rollover Strategies in the Presence of Strategic Customers," Management Science, INFORMS, vol. 60(4), pages 1033-1056, April.

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