From Planned to Dynamic Obsolescence

Abstract

We consider a two-period model where a durable-goods monopolist might engage in “dynamic obsolescence” by changing the durability of the good in period 2 from what was planned in period 1 (e.g. through software updates) after consumers have bought it. We show that given the opportunity to do so, in the subgame perfect Nash equilibrium of the game the monopolist chooses to reduce the durability in the second period. Moreover, we show that committing to a durability level leads to higher profits than the profits under dynamic durability adjustment. Our findings indicate that welfare can be enhanced by regulatory support for credible commitment mechanisms, such as warranties and buybacks.