Tuesday, April 10, 2012

So why does planned obsolescence happen in the first place?

I received an email today linking me to a pretty cool video about consumption and the environment.


Starting around 11:00, Annie Leonard (narrator) starts talking about our behavior of purchasing goods then throwing them out 6 months later. It's a process called planned obsolescence, and Leonard claims that it was intentionally designed by corporations in the post-WWII era.

First off - what the heck is planned obsolescence?

It's actually a pretty interesting economic idea. It's the practice of producing goods that are designed to last for short periods of time before breaking down, or being replaced by superior models or designs. (Think about how new editions of textbooks frequently lower the value of past editions, or how Microsoft Word 2009 isn't compatible with the inferior Microsoft Word 2003.)

I won't really comment on how Leonards statement that planned obsolescence was "created" under the Eisenhower administration - because I don't have a clue of the history behind it.

But I WILL talk about the process, because there are certainly market structures that can create these conditions.

As an aside, it's important to not confuse planned obsolescence with just pure innovation. If companies are producing a good that provide much greater benefits than the model that was produced 6 months ago, then it's not planned obsolescence. It's innovation. And innovation is incredibly beneficial to consumers and shouldn't be seen as a corporate conspiracy to screw them over.

But that's not always the case.

Michael Waldman wrote a paper on this very issue in 1993, and explains some of the causes behind the behavior. (His model builds off of conclusions from the Coase-Bulow approach, with slight changes in the definition of planned obsolescence.)

The point  of the  analysis  is to show that  if the monopolist  sells his output,  then both from the firm's private standpoint  and from a social welfare standpoint,  his incentive  will be too high to switch to technology  B  in  the  second  period.  The  reason  is  that  when  he chooses  which  type  of output  to sell  in the  second  period,  he  does not internalize  how his  choice  affects the  value  of the  units  he sold in  the  previous  period.  Or  to  put  the  result  another  way,  the monopolist  faces  a  time-inconsistency  problem;  i.e.,  his  actual technology  choice in the second period is sometimes  different  from the  choice  he would  make  if he  could  commit  to his  second-period technology  in the first period.
To put it more concisely - when a firm produces in time period 1, they aren't taking into account the affects of how it produces in time period 2.

Waldman writes that this leads to firm behavior that is less than socially optimal as a result of misplaced incentives.

So what is the policy solution to this situation? Waldman addresses that as well:
In  a  Coase-Bulow-type setting,  it  is  true  that  a  prohibition  on  leasing  serves  to  reduce monopoly  power.  However,  it  is  also  the  case  that  forcing  the monopolist  to sell may cause  inefficiencies  in production  due to the monopolist's  attempt  to avoid the time-inconsistency  problem. For example,  the  monopolist  might  respond  by building  less  than  the socially  optimal  level  of durability  into  his  output.  The subsequent result  is  that  even  though  a  prohibition  on  leasing  decreases monopoly  power,  it is still  possible  for social welfare  to be reduced by such a rule.

If a monopoly was leasing a good (if consumers rented the good while the firm retained full ownership) than this behavior would be avoided, because the firm would avoid actions that would lower the costs of their assets (i.e. they wouldn't produce goods the devalue their current assets every few weeks). However, current monopoly regulations prohibit a monopoly to lease a durable good, which is a measure upheld by the supreme court to regulate monopoly power. So while allowing leasing may reduce planned obsolescence, it would be at the cost of reduced monopoly power. Bummer.

For now, college students should still expect to have to buy the new edition of their math textbook and be ready to throw their old copies out.

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