An Economic Theory of Planned Obsolescence

Planned Obsolescence is the production of goods with uneconomically short useful lives so that customers will have to make repeat purchases. However rational customers will pay for only the present value of the future services of a product. Therefore profit maximization might seem to imply producing any given flow of services as cheaply as possible, with production involving efficient useful lives. This paper shows why the above analysis is incomplete and therefore incorrect. Monopolists are shown to generally desire uneconomically short useful lives for their goods. Oligopolists have the monopolist’s incentive for short lives as well as a second incentive that may either increase or decrease their chosen durability. However, oligopolists can generally gain by colluding on a low durability. The relation between the monopolists’ and oligopolists’ incentives to alter the rate of obsolescence and their incentives to divide their placements between sales and rentals is detailed. Some evidence is presented that appears to be generally consistent with the predictions of the theory.