durable goods and product obsolescence the issue of product obsolescence is addressed by examining the optimal sales strategy of a monopolist firm that may introduce an improved version of its current product consumers expectations of a forthcoming product lowers the price that they are willing to pay for the current product because of its loss in value due to obsolescence the new product is characterized by consumers increased willingness to pay and by its competitive interaction with the old product these characteristics affect the tradeoff that the firm makes between the cost of waiting for new product sales versus the cost of cannibalizing these sales we analyze the effect of these characteristics of the new product on the firm s optimal sales strategy we consider the various policy measures available to the firm including limiting initial sales in order to lower cannibalization of the new product buying back the earlier version of the product in order to generate greater demand for the new product and announcements of future product introductions we find that for modest levels of product improvement the firm s optimal policy is to phase out sales of the old product while for large improvements a buy back policy is more profitable lastly we find that the firm is better off if it informs consumers whether a new product is forthcoming

durable goods monopolists durable goods monopolists face special problems because the sale of their products creates a secondhand market not controlled by the monopolist to the extent the monopolist is able to rent his product rather than sell it or to make binding promises about his future production such problems are ameliorated given the inability to do the above the monopolist is led to producing goods less durable than those produced by either competitive firms or monopolist returns a reverse averch johnson result that monopolist sellers may invest less in fixed costs including plant modernization and research and development than would the renters is shown it is also shown that even though sellers have less monopoly power than renters and nondurable goods monopolists it is possible that the seller will cause a greater deadweight loss than the other types of monopolies

installed base and compatibility innovation product preannouncements and predation a good is often more valuable to any user the more others use compatible goods the authors show that this effect may inhibit innovation if an installed base exists and transition to a new standard must be gradual early adopters bear a disproportionate share of transient incompatibility costs this can produce excess inertia the installed base however is stranded if the new standard is adopted this may create excess momentum these dynamic effects have strategic implications temporary price cutting can permanently prevent entry and product preannouncements can be critical in innovation these strategic actions have ambiguous welfare effects

platform competition in two sided markets many if not most markets with network externalities are two sided to succeed platforms in industries such as software portals and media payment systems and the internet must get both sides of the market on board accordingly platforms devote much attention to their business model that is to how they court each side while making money overall this paper builds a model of platform competition with two sided markets it unveils the determinants of price allocation and end user surplus for different governance structures profit maximizing platforms and not for profit joint undertakings and compares the outcomes with those under an integrated monopolist and a ramsey planner jel l5 l82 l86 l96

competition in durable goods markets the strategic consequences of leasing and selling in marketing durable goods manufacturers use varying degrees of leasing and selling to consumers e g cars photo copiers personal computers airplanes etc the question that this raises is whether the distinction between leases and sales is simply one of price or whether the proportion of leases and sales effects a firm s ability to compete in the market in this paper we use two approaches to argue that leasing and selling create strategic consequences that extend beyond prices first we develop a stylized theoretical model that shows that the optimal proportion of leases and sales depends on the competitiveness of the market and on the inherent reliability of the firm s product and second we find support for the implications of our theoretical model with data from the automobile industry the u s automobile industry has seen a large increase in leasing over the last five years however the extent to which leasing has been embraced varies widely across manufacturers for example in 1993 the sport utility segment had the following lease percentages ford explorer 29 jeep grand cherokee 24 toyota 4 runner 11 and chevrolet blazer 9 in addition manufacturers often vary lease percentages across models for example in 1993 ford leased 22 of its crown victoria model 35 of its taurus model and 42 of its probe model a popular argument for why we see these differences is that higher priced cars are leased more often because leasing makes them more affordable however this rationale is not compelling in the face of our data for example the ford probe was priced significantly lower than the crown victoria and yet it was leased almost twice as often to develop a better understanding of why we observe differences in the proportion of leasing we develop a two period model of a duopoly in which each manufacturer chooses its optimal quantity and the fraction of units it wants to lease we find that in equilibrium neither firm leases all its units either they use a mix of leasing and selling or they use only selling our analysis suggests that the fraction of leased cars decreases as the manufacturers products become more similar and the competition between them increases the intuition for this result is that a higher fraction of leases puts the firm at a competitive disadvantage in the future this occurs because unlike firms that sell their product firms that lease are at a price disadvantage another important finding in this paper is that the extent of leasing chosen by a manufacturer depends on the reliability of its product in particular all else being equal the lower a product s reliability the lower its proportion of leases within the context of the automobile industry this suggests that more expensive cars may be leased more often because they are of higher quality and not necessarily because they are more expensive finally we test the implications of our theoretical model with data from the u s automobile market in particular for 1993 model year cars we develop a measure of reliability using data from consumer reports in addition we develop a measure of the extent of competition in each segment of the automobile market we support our hypotheses by finding that the extent to which a car model is leased depends strongly on its predicted reliability and on the competitive intensity within the segment

cyclic pricing by a durable goods monopolist in the model of this paper a monopoly seller of a durable good holds periodic sales as a means of price discrimination a new cohort of consumers enters the market in each period interested in purchasing the good either immediately or after a delay within each cohort consumers vary in their tastes for the good under broad conditions the seller will vary the price over time in most periods he will charge a price just low enough to sell immediately to consumers with a high willingness to pay periodically however he will drop the price far enough to sell to an accumulated group of consumers with a low willingness to pay

an economic theory of planned obsolescence planned obsolescence is the production of goods with uneconomically short useful lives so that customers will have to make repeat purchases however rational customers will pay for only the present value of the future services of a product therefore profit maximization seemingly implies producing any given flow of services as cheaply as possible with production involving efficient useful lives this paper shows why this analysis is incomplete and therefore incorrect monopolists are shown to desire uneconomically short useful lives for their goods oligopolists have the monopolist s incentive for short lives as well as a second incentive that may either increase or decrease their chosen durability however oligopolists can generally gain by colluding to reduce durability and increase rentals relative to sales some evidence is presented that appears to be generally consistent with the predictions of the theory

concurrent renting and selling in a durable goods monopoly under threat of entry this article analyzes the choice of contract sales or rental of a durable goods monopolist facing a threat of future entry although in the absence of such a threat a monopolist would prefer to rent his entire output we show that the threat of entry alters that preference there is an optimal preentry contract mix involving both rental and sales if both firms behave as cournot duopolists after entry the optimal choice of preentry contracts enables the erstwhile monopolist to gain the same profits as he would if he behaved as a von stackelberg leader

product line decisions and the coase conjecture we show that the coase conjecture does not hold when a durable goods monopolist also sells nondurable goods that are demand related to the durable the presence of nondurable complements or substitutes reduces the rate at which the monopolist introduces the durable into the market the price of the durable does not converge to marginal cost we analyze the incentives of a monopolist to extend his product line to a durable or a nondurable most significantly the profit from adding a durable to the product line disappears as the time between offers becomes short we study the effects of entry into markets for nondurables and their implications for merger policy

a new perspective on planned obsolescence automobile manufacturers have long had a policy of introducing annual style changes into their new model cars textbook publishers have a policy of periodically bringing out revised editions of their popular books recently ibm changed the operating system used in its personal computers causing a reduction in the compatibility between its old and new machines if one were to ask the typical man in the street to explain what is happening in these markets he would not hesitate before giving the following answer in economists terminology he would say that for the above firms the incentive to introduce new products that make old units obsolete is too high i e the firms have an incentive to practice planned obsolescence of course just as is true for the man in the street economists have also long observed and commented on the speed with which new products are introduced for example galbraith 1958 suggests that the annual model changes of automobile manufacturers are socially wasteful while fisher griliches and kaysen 1962 provide empirical estimates of the costs of these changes there have also been numerous theoretical attempts to model the idea of planned obsolescence or the related idea of killing off the market for secondhand goods but most of these models have in fact considered the choice a monopolist faces concerning how much durability to build initially into his product rather than the monopolist s incentive to introduce new versions of his product over time 1 in this paper i consider planned obsolescence from the standpoint of a firm that can change the nature of what it sells and show that the man in the street is in fact correct in many settings the incentive for a durable goods monopolist to introduce new products that make old units obsolete will be above that which is socially optimal

durable goods monopolists rational consumers and improving products we consider the case of a monopolist supplying an improving durable product to a population that is heterogeneous in its valuation of product quality in a two period framework we show that if consumers expect the product to improve in present value terms then intertemporal discrimination might result in the first period marginal consumer being left with zero surplus and some higher end consumers postponing purchase the resulting trajectories for quality and price do not constitute a subgame perfect equilibrium one of our conclusions is that the logic of profit maximization in the context of rational consumer choice imposes a demand side constraint on the rate of product improvement we also emphasize the disequilibrium consequences of improving a product so rapidly that high end consumers are tempted to wait for a future new and improved version finally the formulation adopted in the paper may be useful to understand observed differences in product improvement rates in different markets

a cue theory of consumption psychological experiments demonstrate that repeated pairings of a cue and a consumption good eventually create cue based complementarities the presence of the cue raises the marginal utility derived from consumption in this paper such dynamic preferences are embedded in a rational choice model behavior that arises from this model is characterized by endogenous cue sensitivities costly cue management commitment and cue based spikes in impatience the model is used to understand addictive habit forming behaviors and marketing the model explains why preferences change rapidly from moment to moment why temptations should sometimes be avoided and how firms package and position goods

network externality compatibility choice and planned obsolescence this paper attempts to provide a formal theory of planned obsolescence based on incompatible technologies in the presence of network externalities the author explores how a monopolist s ability to make the new product incompatible with the old version of a product constrains the optimal dynamic behavior of the monopolist the social optimum and the market equilibrium are compared finally the possibility of quality distortion is considered as a commitment mechanism to the future compatibility choice copyright 1994 by blackwell publishing ltd

pricing for a durable goods monopolist under rapid sequential innovation a durable goods monopolist who will be introducing new and improved versions of his product must decide how to price his products keeping in mind the relative attractiveness of the current and future products dhebar 1994 has shown that if technology is changing too quickly and the producer cannot credibly commit to future prices and quality then no equilibrium strategy exists that is there is no credible strategy for the future product that the producer can commit to in the first period we show that an equilibrium pricing strategy exists if the monopolist does not offer upgrade pricing that is special pricing to consumers who have bought an earlier version the author shows the possible purchase patterns in equilibrium and derives the optimal pricing strategy

resource fungibility the flypaper effect and the expenditure impact of grants in aid the typical assumption that intergovernmental grants in aid alter a recipient s budget constraint according to the legal provisions of grant programs was first challenged by mcguire 1975 1978 in a model where local officials are able to convert some fraction of conditional aid into pure fungible resources this paper develops a model of local government expenditure decisions based on mcguire s original work and applies it to data for large u s city governments the results lend strong support to the fungibility hypothesis additionally and importantly the results provide very little evidence in support of the so called flypaper effect of unconditional grants this is due to a more appropriate specification of the unconditional aid variable

modeling the evolution of markets with indirect network externalities an application to digital television the usefulness of a technology product for an end user often depends on the availability of complementary software products and services computers require software cameras require film and dvd players require movie programming in order for customers to value the whole product this phenomenon where the demand for hardware products is mediated by the supply of complementary software products is called an indirect network externality indirect network externalities create a two way contingency between the demand for the hardware product and the supply of software products and result in a strategic interdependence between the actions of hardware manufacturers and the actions of software providers indirect network externalities are gaining economic significance in technology markets because hardware and software are typically provided by independent firms and both sets of firms have an incentive to free ride on each others demand creation efforts despite the ubiquity of this phenomenon it has largely been ignored in the marketing science literature we present a conceptual and operational model for the evolution of markets with indirect network externalities the key feature of our framework is to model the market mediated dependence between the actions of hardware manufacturers and software complementors created by the direct dependence of consumer demand for the whole product on the actions of manufacturers as well as complementors in addition we incorporate marketing mix effects on consumer response aswell as heterogeneity in consumer preferences for hardware and software attributes we model consumer response usinga latent class choice model to estimate the complementor response functions we use a modified delphi technique that allows us to convert qualitative response data into quantitative response functions we integrate the consumer and complementor response models to create a simulation modelthat generates forecasts of market shares and sales volumes for competing technologies as a function of marketing mix effects and exogenously specified regulatory scenarios the modeling framework is of interest to new product modelers interested in creating empirical models and decision support systems for forecasting demand in technology markets characterized by indirect network externalities the decision support aspects of the modeling framework should appeal to managers interested in understanding and quantifying the complex interplay between hardware manufacturers and software complementors in the evolution of markets with indirect network externalities we present an application of the modeling framework to the u s digital television industry and use the framework to characterize the competition among analog and digital tv technologies our results suggest that complementor actions play an important role in the acceptance of digital tv technologies in general and high definition television hdtv in particular we find that forecasts that ignore the influence of indirect network externalities would be seriously biased in favor of hdtv we illustrate how the modeling framework can be used to identify and profile customer segments in the digital tv market based on their utility for hardware related features as well as programming related features we also illustrate the decision support capabilities of the modeling framework by evaluating the sensitivity of the forecasts to varying marketing regulatory and complementor response scenarios we derive implications for marketing and public affairs policies of the hardware manufacturers the developments in the digital tv industry generally support our finding that hdtv will be a niche product and will diffuse slower than originally expected due in part to the lack of programming the delays in the introduction of digital tv to the marketplace also suggest that most forecasts for infrastructure intensive technologies like digital tv may be too optimistic simply because they underestimate the delays in agreeing upon technology standards and resolving regulatory debates

durable goods monopoly with discrete demand we analyze a dynamic game between consumers and the sole seller of a durable good unlike previous analyses we assume that there exists a finite collection of buyers rather than a continuum none of the main conclusions of the literature on durable goods monopoly survives this change in assumption coase s conjecture that a durable goods monopolist cannot earn supracompetitive profits in the continuous time limit bulow s proposition that renting a durable is always more profitable than selling it and stokey s proposition that precommitting to a time path of prices is always optimal are all false when the set of buyers is finite thus the assumption of a continuum of consumers so innocuous and useful a simplification in other contexts has proved misleading in the context of durable goods monopoly

durable good monopolies with rational expectations and replacement sales a monopoly producer of a durable good is examined under the previously uninvoked assumption that the good depreciates and hence that replacement sales must occur if a fixed stock of the good is to be maintained we find two ways in which the no depreciation result that the monopoly will always at least eventually produce a stock equal to that produced by a competitive market may not hold if the length of the trading period is nonzero the limiting stock produced by the firm will be lower than the competitive stock to ensure the profitability of future replacement sales if the firm is able to constrain its production capacity it may choose a constraint that always binds in the sense that it will be impossible for the firm to achieve a stock equal to the competitive stock

modifying customer expectations of price decreases for a durable product we study the introductory signalling strategy for a durable product that faces optimistic expectations among customers about price declines over time the firm introducing the product knows that experiential learning is low for the product however customers being uncertain about the extent of experiential learning assign a nonzero probability that the firm s new product will enjoy a high cost reduction with cumulative experience the optimistic expectations of customers reduce their willingness to pay a high price at the product s introduction while predisposing them to buying later the challenge facing the low experience firm is to choose an introductory strategy that will credibly convey the low experience curve effect to customers we use the sequential equilibrium concept in a game theoretic framework to identify the firm s signalling strategy we identify the unique separating equilibrium of the game after refining the set of separating equilibria we demonstrate that a high introductory price credibly signals the low experiential learning to customers we also show that signalling causes an artificial learning curve effect

systems competition and network effects this paper discusses firm behavior market performance and the public and private institutions that arise in systems markets i e markets where consumers use compatible components together to generate benefits in such markets which include communications networks and hardware software networks popular products are inherently more valuable these network effects can drive corporate strategies and are critical in understanding innovation in many high technology markets the discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects competition between incompatible systems and how suppliers choose which components are compatible and which are not

obtaining strategic advantage from being imitated when can encouraging clones pay an important business strategy research theme concerns finding ways to minimize competition faced by the firm this paper however focuses on a different set of situations the model developed suggests that an innovator s best strategy may be to encourage clones of its product when a network externality is present key factors to consider in assessing whether encouraging cloning is the innovator s best strategy are 1 the benefit to be derived in terms of added user base contributed by the clone sales traded off against 2 the unit sales that will be lost to the clones these factors in turn depend upon the strength of the network effect and the degree to which the innovator s product quality is perceived by consumers to be superior to the clone s the model further suggests that both the innovator and clone earn their highest payoffs when the clone takes the lead in price setting i e when the clone establishes its own price by considering for each price it might set how the innovator will react to that price and the innovator as price follower responds to the price the clone chooses the paper demonstrates that the clone leader innovator follower situation represents the unique nash equilibrium in price setting strategies a central implication is that when operating in a network externality environment instead of a problem to be avoided clones may be valuable assets to an innovating firm building up the user base for the innovator s technology by bringing lower valuing consumers into the market which in turn makes the innovator s product more attractive to high and medium valuing purchasers thus when the above described conditions hold being cloned can be more profitable for an innovating firm than dominating the market alone

selling and leasing strategies for durable goods with complementary products it has been recognized that when a durable goods manufacturer sells its output it has an incentive to produce at a rate that will drive down the market price of the product over time because anticipation of declining prices makes consumers less willing to invest in owning the durable good selling can be self defeating for the manufacturer if the manufacturer instead leases the product it can eliminate its own incentive to decrease the price over time which allows it to extract larger rents from consumers in this paper we investigate how a durable goods manufacturer s choice between leasing and selling is affected by a complementary product that is produced by an independent firm we show that a durable goods manufacturer that leases its product has an incentive to increase prices by limiting the availability of the product in response to the availability of a complement because this potential for opportunistic behavior discourages output of the complement leasing can also be problematic as a result the durable goods manufacturer faces a trade off between leasing which commits the manufacturer to not overproduce and selling which commits it to not underproduce our contribution is to identify this trade off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market