Planned Obsolescence and the Quality Choice of Durable Goods
Planned obsolescence refers to the situation where a company has too high an incentive to create a new product that renders the old durable goods non-compatible or obsolete. Does this incentive persist when the firm can choose what quality level the new product has, instead of simply introducing a new product of a given improved quality? Assuming the outcome of innovation is quality increase in next periods, this dissertation focuses on the effect of planned obsolescence in relation to a monopolist’s R&D investment and quality choices. The monopolist is not choosing whether or not to introduce a new product, but rather how much quality the new product should have, or in other words, how long the continuous R&D investment should last. When a minor evolution (i.e. lower quality improvement) and a major revolution (i.e. higher quality improvement) of durable goods are mutually exclusive, for a certain range of R&D investment cost, a monopolist is found to have too low an incentive to introduce the major revolution. This situation is defined as planned obsolescence of quality. The reason for such a behavior is time inconsistency, i.e. a monopolist’s failure to commit to its original profit-maximizing quality strategy once it enters the latter stage of the game. However if evaluated from a social planner’s perspective, planned obsolescence of quality, or the lack of commitment, turns out to be beneficial in alleviating the problem of socially excessive quality at least partially. Once it can be perceived that the monopolist will not commit to its original optimal quality choice, a new discrepancy would emerge between the monopolist and a social planner. It is still beneficial for a social planner to intervene for certain ranges of R&D investment cost. Under such circumstances, R&D subsidies may be considered to induce the monopolist to move out of the range of discrepancy, provided that the gain in social welfare is larger than the cost of subsidy. This cost is smaller when the monopolist’s marginal production cost is smaller.