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The Effects of Product Ageing on Demand: The Case of Digital Cameras

Weifang Lou (), David Prentice and Xiangkang Yin
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Weifang Lou: School of Economics, La Trobe University

No 2008.06, Working Papers from School of Economics, La Trobe University

Abstract: The static differentiated product demand model when applied to products with rapid product turnover and declining prices, yields implausible results. One response is to explicitly model the inter-temporal choices of consumers but computational demands require restrictive assumptions on consumer heterogeneity and limits on the characteristics included in the model. We propose, instead, to supplement the static model with a control for the age that each product has been in the market. This approach is applied to the US digital camera market and we find we obtain more plausible estimates. Our results are consistent with inter- temporal price discrimination by firms. Furthermore, our results suggest that ignoring the effects of product ageing may result in substantially overestimated price elasticities and technological progress and underestimated price-cost mark-ups.

Keywords: Discrete Choice; Demand Dynamics; Forward-Looking Behavior; Heterogeneous Preferences (search for similar items in EconPapers)
JEL-codes: D12 D24 L63 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2008-11
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