Destructive Creation

Emilio Calvano

No 653, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: "Destructive Creation" is the deliberate introduction of new, perhaps improved generations of durable goods that destroy, directly or indirectly, the usage value of units previously sold inducing consumers to repeat their purchase. This paper discusses this practice by a single seller in an infinite-horizon, discrete time model with heterogeneous consumers. Despite the lack of commitment power over future prices and introduction policies, this practice restores partially or totally market power even though consumers anticipate opportunistic behavior. However, the monopoly resorts "too much" to this mechanism from an ex-ante, profit maximizing perspective. High prices in earlier periods allow the seller to commit to defer innovation and therefore to maintain buyers' confidence over "durability". The paper characterizes the equilibrium properties of the resulting innovation cycles such as existence, uniqueness and asymptotic stability and discusses potential regulatory remedies in those instances where destructive creation generates economic inefficiencies. This theory applies, among others, to markets characterized by network externalities, compatibility issues, standard setting, social consumption and signal provision and may help explain many restrictive aftermarket practices as well as excessive add-on pricing without relying on any leverage hypothesis.

Keywords: durable goods; aftermarkets; planned obsolescence (search for similar items in EconPapers)
JEL-codes: D42 L12 L15 O31 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2006-12-22, Revised 2007-12-30
New Economics Papers: this item is included in nep-com, nep-ino, nep-mic and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://swopec.hhs.se/hastef/papers/hastef0653.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:hastef:0653

Access Statistics for this paper

More papers in SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Helena Lundin ().