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The Durability of Goods and Regulation of Monopoly

Author

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  • Peter L. Swan
Abstract
This paper reconsiders the proposition put forward by many economists that monopolies would produce less durable assets than would competitive firms. The key assumption made is that assets are desired for the services they provide. It is shown that, as all firms desire to minimize the cost of providing any given service, monopoly and competitive firms will select the same degree of durability. Although this result is proved for goods subject to exponential decay, the result can be generalized to an arbitrary decay function. A number of earlier writers reached mistaken conclusion basically because of their neglect of the initial demand for the good. Durability choice by a monopolist is unaffected by price or demand conditions so long as the firm is permitted to operate in the elastic portion of the demand curve. Price regulation will have no effect on the choice of durability unless an attempt is made to force the firm to operate in the inelastic portion of the demand curve. If this attempt is made, output will remain unchanged and costs will be increased so as to satisfy the unit cost mark-up constraint. In this case, the regulator should ensure that durability remains unaltered at the previous level.

Suggested Citation

  • Peter L. Swan, 1971. "The Durability of Goods and Regulation of Monopoly," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 347-357, Spring.
    • Handle: RePEc:rje:bellje:v:2:y:1971:i:spring:p:347-357
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    Cited by:

    1. Partha Gangopadhyay & Takemi Fujikawa & Yohei Kobayashi, 2013. "Why Is It So Difficult to Optimally Choose Innovation? Lest We Forget the Real World," Modern Applied Science, Canadian Center of Science and Education, vol. 7(5), pages 1-39, May.
    2. Judith Chevalier & Austan Goolsbee, 2009. "Are Durable Goods Consumers Forward-Looking? Evidence from College Textbooks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1853-1884.
    3. Gerstle, Ari D. & Waldman, Michael, 2016. "Mergers in durable-goods industries: A re-examination of market power and welfare effects," Research in Economics, Elsevier, vol. 70(4), pages 677-692.
    4. Goering, Gregory E, 1992. "Innovation, Product Durability, and Market Structure," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(4), pages 699-723, Winter.
    5. Eric Brouillat, 2011. "Durability of consumption goods and market competition: an agent-based modelling," Post-Print hal-00780254, HAL.
    6. Galiani, Sebastian & Jaitman, Laura & Weinschelbaum, Federico, 2020. "Crime and durable goods," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 146-163.
    7. Carlaw, Kenneth I., 2005. "Optimal obsolescence," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 69(1), pages 21-45.
    8. Adriano A. Rampini, 2019. "Financing Durable Assets," American Economic Review, American Economic Association, vol. 109(2), pages 664-701, February.
    9. Eric Brouillat, 2015. "Live fast, die young? Investigating product life spans and obsolescence in an agent-based model," Journal of Evolutionary Economics, Springer, vol. 25(2), pages 447-473, April.
    10. Rubing Li & Arun Sundararajan, 2024. "The Rise of Recommerce: Ownership and Sustainability with Overlapping Generations," Papers 2405.09023, arXiv.org.
    11. Jonathan R. Peterson & Henry S. Schneider, 2017. "Beautiful Lemons: Adverse Selection in Durable-Goods Markets with Sorting," Management Science, INFORMS, vol. 63(9), pages 3111-3127, September.
    12. Turkan Muge Ozbekler & Yucel Ozturkoglu, 2020. "Analysing the importance of sustainability‐oriented service quality in competition environment," Business Strategy and the Environment, Wiley Blackwell, vol. 29(3), pages 1504-1516, March.
    13. Smith Loren K., 2009. "New Market Policy Effects on Used Markets: Theory and Evidence," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-27, July.
    14. Hiroshi Kinokuni & Shuichi Ohori & Yasunobu Tomoda, 2019. "Optimal Waste Disposal Fees When Product Durability is Endogenous: Accounting for Planned Obsolescence," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(1), pages 33-50, May.
    15. Pasquale Schiraldi, 2006. "Second-Hand Markets and Collusion by Manufacturers of Semidurable Goods," Boston University - Department of Economics - Working Papers Series WP2006-028, Boston University - Department of Economics.
    16. Fethke, Gary & Jagannathan, Raj, 2000. "Why would a durable good monopolist also produce a cost-inefficient nondurable good?," International Journal of Industrial Organization, Elsevier, vol. 18(5), pages 793-812, July.
    17. Goering, Gregory E., 2007. "Durability choice with differentiated products," Research in Economics, Elsevier, vol. 61(2), pages 105-112, June.
    18. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    19. Gregory E. Goering, 2010. "Durability Choice And The Piracy For Profit Of Goods," Metroeconomica, Wiley Blackwell, vol. 61(2), pages 282-301, May.
    20. Gabor Molnar & Scott J. Savage, 2017. "Market Structure and Broadband Internet Quality," Journal of Industrial Economics, Wiley Blackwell, vol. 65(1), pages 73-104, March.
    21. Morton I. Kamien & Nancy Schwartz, 1975. "Optimal Capital Accumulation and Durable Goods Production," Discussion Papers 141, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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