Gregory E. Goering

Oligopolies and product durability

Abstract We analyze a simple two-period quantity setting model where firms rent all of their output. We compare the durability chosen by an oligopolist to the competitive (socially optimal) durability. The model shows in subgame perfect equilibria the durability chosen by oligopolists will be cost-minimizing (independent of their output levels). Thus Swans independence result can be extended to oligopoly markets if the firms rent their output. We also demonstrate the independence result can be extended to certain corner solutions.

Exchange Rate Forecasting: Results from a Threshold Autoregressive Model

Structural models of exchange rate determination rarely forecast the exchange rate more accurately than a naive random walk model. Recent innovations in exchange rate modeling indicate that changes in the exchange rate may follow a self-exciting threshold autoregressive model (SETAR). We estimate a SETAR model for various monthly US dollar exchange rates and generate forecasts for the estimated models. We find: (1) nonlinearities in the data not uncovered by the standard nonlinearity tests and (2) that the SETAR model produces better forecasts than the naive random walk model.

Product Durability and Moral Hazard

Previous durability studies conclude that a monopolist that sells output without any commitment ability will tend to produce output with lower durability than a monopolist that rents output. This paper demonstrates that this conclusion depends critically on the degree of moral hazard (possible damage to output) faced by renting firms. When moral hazard abuse or neglect is introduced in a durability model it is shown that a renter may manufacture output with lower durability than an uncommitted seller reversing the conventional obsolescence result. However, the analysis indicates that, unlike the sellers commitment problem, the presence of moral hazard in rental markets does not cause a failure of the independence of durability and industry structure.

Durable Goods Monopoly and Forward Markets

The existence of forward markets has long been explained by risk hedging behaviour. More recently, attention has focused on the Cournot competition rationale for the emergence of forward markets since the quantity of forward transactions can be used as strategic variable. However, an important facet of many forward markets that has typically been ignored in the literature is the durable nature of output (e.g. nickel and lead). We show that forward markets may optimally emerge as long as a monopolist sells any fraction of its durable output. In particular, the comparative static analysis shows that as the durability of the product increases or the fraction of output sold increases, the monopolist will optimally increase the number of forward contracts purchased due to an exacerbated commitment problem with buyers. Our analysis also provides another explanation for differences between the forward price and the expected future spot price of a commodity that does not rely on uncertainty or risk considerations.

Emissions Taxation in Durable Goods Oligopoly

This paper examines the use of taxation to control external damage due to pollution when product durability is endogenously determined. A special form of the emissions function is also examined which is equivalent to an excise tax on output. The dynamic oligopoly model indicates that many conventional results in the durability and taxation literature need not hold when durability is endogenously determined. In particular, the analysis shows durability may not be independent of industry structure nor will firms minimize their manufacturing costs of providing service. In addition, the second-best tax on imperfectly competitive firms is not necessarily less than the tax on a competitive firm when firms choose their product_s durability.

Taxation and market power when products are durable

Empirical studies suggest that industries hardest hit by government regulations, such as pollution regulations, are both highly concentrated and manufacture durable products. We analyze a two-period durable goods monopoly model where the firm faces government restrictions in the form of pollution or excise taxes. In contrast to non-durable monopolistic industries, we show that taxes on pollution or an excise tax on output may increase a durable goods monopolists commitment ability and market power. Indeed, any policy which restricts future output may have the perverse effect of increasing a monopolists bargaining power with buyers and enhance their profits.

R&D and product obsolescence

Claims of “planned obsolescence” have often been made by various consumer groups. Bulow (1986) examined a monopolists choice of product durability and found that firms who sell their products tend to choose lower durability levels than firms that rent. We argue that the speed of new product development may be a more appropriate proxy for obsolescence than is durability. Reformulating Bulows model in terms of R&D choice rather than durability choice, we find that sales firms engage in higher levels of R&D than do rental firms. Additionally, we provide an empirical example using data from the copier and computer industries which also suggests a strong positive relationship between the R&D intensity of a firm and the proportion of output sold versus rented.

Learning by Doing and Product Durability

Many durable goods industries are industries that have significant learning effects. I examine a monopolists and social planners cost-minimizing durability choice, in both the short and the long run, when learning effects are present. The model indicates that the relationship between durability and learning depends crucially upon whether or not knowledge decays and on learnings impact on the marginal cost of durability. In particular, this model demonstrates that Swans (1970, 1971) independence result will hold in the long run if knowledge does not decay, but will not hold if knowledge does decay. Thus, whether or not monopolists will manufacture products with the same durability or quality as a social planner depends to a large extent on the type of learning process in the industry and on whether or not quality and durability directly influence this learning process. Copyright 1993 by The London School of Economics and Political Science.

Distribution Channel Decentralization and Strategic Durability Choice

Abstract In a simple two‐period setting we examine a decentralized distribution (marketing) channel consisting of an up‐stream durable‐goods manufacturer and down‐stream retailer. The manufacturer sets the wholesale price and the product’s durability while the retailer selects an output level. We show that in this setting, the profit‐maximizing manufacturer unambiguously selects a higher durability than the socially efficient (cost‐minimizing) level in both uncommitted sales and rental markets. We show this ‘reversed planned obsolescence’ result is due to the strategic benefit of durability in this double‐marginalization (double monopoly mark‐up) setting. This is in stark contrast to the usual integrated channel result where the profit‐maximizing manufacturer will select an efficient level of durability in rental markets and an inefficiently low durability in uncommitted sales markets (due to the selling firm’s commitment problem with potential buyers). Intuitively, with a decentralized distribution channel, the manufacturer faces potential commitment problems with both current buyers and its down‐stream retailer. We show, only in cases where both sources of commitment issues are removed (i.e. the manufacturer can credibly commit to both potential buyers and its retailer), will the profit‐maximizing durability choice be socially efficient.

Durable Goods and Switching Costs

A simple two-period switching cost model is developed and analyzed assuming durable output. The analysis indicates that many of the conventional managerial implications of the switching cost literature need not hold if products are durable. In particular, the model indicates that managers of durable goods firms that lease or rent output may wish to decrease their customer base (provide service to only a subset of the experienced customers) in future periods, in contrast to the non-durable goods case where the number of customers served is the same. Moreover, the model shows that the optimal behavior of sellers of durable products depends critically upon their commitment ability with buyers, and outlines the conditions under which a manager selling output may rationally expand their customer base (i.e. sell to new customers in a future period).