The Design of Durable Goods

Oded Koenigsberg (), Rajeev Kohli () and Ricardo Montoya ()
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Oded Koenigsberg: Graduate School of Business, Columbia University, New York, New York 10027
Rajeev Kohli: Graduate School of Business, Columbia University, New York, New York 10027

Marketing Science, 2011, vol. 30, issue 1, 111-122

Abstract: The use of a durable good is limited by both its physical life and usable life. For example, an electric-car battery can last for five years (physical life) or 100,000 miles (usable life), whichever comes first. We propose a framework for examining how a profit-maximizing firm might choose the usable life, physical life, and selling price of a durable good. The proposed framework considers differences in usage rates and product valuations by consumers and allows for the effects of technological constraints and product obsolescence on a product's usable and physical lives. Our main result characterizes a relationship between optimal price, cost elasticities, and opportunity costs associated with relaxing upper bounds on usable and physical lives. We describe conditions under which either usable life or physical life, or both, obtains its maximum possible values; examine why a firm might devote effort to relaxing nonbinding constraints on usable life or physical life; consider when price cuts might be accompanied with product improvements; and examine how a firm might be able to cross-subsidize product improvements.

Keywords: product life; product design; technology development; durable goods; pricing (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:30:y:2011:i:1:p:111-122

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