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Product Durability in Markets with Consumer Lock-in

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  • Langenberg, Tobias

Abstract

This paper examines a two-period duopoly where consumers are locked-in by switching costs that they face in the second period. The paper's main focus is on the question of how the consumer lock-in affects the firms' choice of product durability. We show that firms may face a prisoners' dilemma situation in that they simultaneously choose non-durable products although they would have higher profits by producing durables. From a social welfare perspective, firms may even choose an inefficiently high level of product durability.

Suggested Citation

  • Langenberg, Tobias, 2009. "Product Durability in Markets with Consumer Lock-in," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 279, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    • Handle: RePEc:trf:wpaper:279
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    File URL: https://epub.ub.uni-muenchen.de/13275/1/279.pdf
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    References listed on IDEAS

    as
    1. A. Jorge Padilla, 1992. "Mixed Pricing in Oligopoly with Consumer Switching Costs," Working Papers wp1992_9203, CEMFI.
    2. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 515-539.
    3. Paul A. Grout & In-Uck Park, 2005. "Competitive Planned Obsolescence," RAND Journal of Economics, The RAND Corporation, vol. 36(3), pages 596-612, Autumn.
    4. Joseph Farrell & Nancy T. Gallini, 1988. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(4), pages 673-694.
    5. Choi, Jay Pil, 1994. "Network Externality, Compatibility Choice, and Planned Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 167-182, June.
    6. Fishman, Arthur & Gandal, Neil & Shy, Oz, 1993. "Planned Obsolescence as an Engine of Technological Progress," Journal of Industrial Economics, Wiley Blackwell, vol. 41(4), pages 361-370, December.
    7. Farrell, Joseph & Gallini, Nancy T., 1986. "Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition," Department of Economics, Working Paper Series qt8zs1p5cc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    8. Farrell, Joseph & Shapiro, Carl, 1989. "Optimal Contracts with Lock-In," American Economic Review, American Economic Association, vol. 79(1), pages 51-68, March.
    9. Farrell, Joseph & Gallini, Nancy T., 1987. "Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition," Department of Economics, Working Paper Series qt4zr9b9dr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    10. Michael Waldman, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 273-283.
    11. Farrell, Joseph & Shapiro, Carl, 1987. "Optimal Contracts with Lock-In," Department of Economics, Working Paper Series qt19f324hf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    12. Padilla, A. Jorge, 1992. "Mixed pricing in oligopoly with consumer switching costs," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 393-411, September.
    13. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Consumer Lock-in; Product Durability; Duopoly;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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