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When is it Optimal to Kill off the Market for Used Durable Goods?

John Rust

Abstract

It is commonly believed that textbook publishers attempt to "kill off" competition from used textbooks through yearly edition changes. In the context of Wicksell's model of durable goods, Peter Swan has shown that such "planned obsolescence" is never optimal: a monopolist seller of durable goods maximizes profits by setting product durability equal to the competitive or socially optimal level, and efficiently extracts consumer surplus through sales price alone. This paper formulates a monopolist seller's choice of price and durability as the solution to a Stackelberg game between the monopolist and consumers. We employ a new equilibrium model of a durable goods market which, unlike Wicksell's model, recognizes that scrappage of durables is endogenously determined. We show that with endogenous scrappage, consumers have a substitution possibility which constrains the profits of a monopolist seller. This constraint on profits causes the monopolist to distort durability from the socially optimal level. We derive conditions under which this distortion takes its most extreme form: the monopolist kills off competition from used durables by producing new assets of zero durability.