Saturday, October 31, 2009
Posted by D. Daniel Sokol
Tobias Langenberg (Free University of Berlin) has a new working paper on Product Durability in Markets with Consumer Lock-in.
ABSTRACT: This paper examines a two-period duopoly where consumers are locked-in by switching costs that they face in the second period. The paper's main focus is on the question of how the consumer lock-in affects the firms' choice of product durability. We show that firms may face a prisoners' dilemma situation in that they simultaneously choose non-durable products although they would have higher profits by producing durables. From a social welfare perspective, firms may even choose an inefficiently high level of product durability.