How durable should durable products be made under different scenarios of technological advance?

Lian Qi and James Sawhill

International Journal of Production Economics, 2014, vol. 156, issue C, 75-82

Abstract: This paper addresses the question of how durable or reliable manufacturers of durable goods should make their products. Essentially, consumers are likely willing to pay more for a more durable product, yet increased durability depresses replacement demand. We gain insight into this trade-off by developing analytical models of the interplay between consumers and a monopolist manufacturer of durable goods. We start this research from the base model that assumes symmetric information between the manufacturer and consumers and no technological advance. We then extend it to more general models in which these assumptions are relaxed. Interesting managerial insights are obtained, which explain well some realistic cases observed in practice: (1) when the technology advances at a given non-negative rate, it is always optimal for the manufacturer to motivate consumers to replace the existing durable goods (by using a buy-back offer) before the end of the life of the product; (2) faster technological advance does not always bring quicker product replacements—under some circumstances, it might be optimal for manufacturers to extend the replacement cycle of the product and increase its durability when the technology advances more quickly; and (3) when the rate of the technological advance is uncertain and is not directly observable by consumers, consumers are willing to pay more than when the technological advance rate is known and constant.

Keywords: Durable products; Replacement cycle; Depreciation rate; Technological advance (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:156:y:2014:i:c:p:75-82

DOI: 10.1016/j.ijpe.2014.05.014

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