Planned Obsolescence: Competition Against Longevity

Last time, I shared with you the story of Phoebus – a 20th century cartel that sought to fix light bulb prices as well as harm product innovation with reduced longevity. Doing so would mean strong demand for replacement products, and fortified sales volumes. Since those early days though, some economic literature has surfaced to formally analyse the rationale behind planned obsolescence in imperfectly competitive markets. With this understanding in mind, we find that there are plenty of remarkable examples of planned obsolescence today.

Bulow’s[1] work clearly defined the mechanics behind physical, functional planned obsolescence. In his paper, Bulow examines both monopolist behaviour and oligopoly behaviour in terms of setting durability of goods offered in a market. By reducing the longevity of the good produced, fewer quantities would remain in subsequent periods. It is this restriction of quantity which allows for higher prices in the market, as well as higher subsequent sale volumes. To be time consistent, a rational firm would commit to an inefficiently low durability, to protect tomorrow’s revenues, even if a more robust product fetches a better price today.

Bulow’s contribution well explains the functional planned obsolescence in consumer-grade printers. While the market for printers is competitive, each manufacturer is an effective monopolist in producing ink refills and parts for its own products. Without getting too technical, many parts contained within are monitored by an electronic chip. Whilst the cartridge or part may still be functionally or mechanically sound, after an arbitrary number of prints, it is prematurely disabled and rendered dysfunctional. Manufacturers are free to set this ‘durability’ cap as they see fit, and with their monopolistic power, choose to limit the lifespan of their product, ensuring timely replacement as desired.

Bulow’s case for an oligopolist becomes more complex, however. With imperfect competition, the firm has to not only consider its own production quantities over time, but also their competitor’s actions. Products with greater durability would reduce the amount competitors can sell in subsequent periods. Diminishing competitor sales has the potential to lead to greater profits, and so Bulow believes that firms locked in imperfect competition have some incentive to improve product durability beyond that of a monopolist.

Guiltinan[2] would argue differently, believing that competition fuels planned obsolescence instead of impeding it. He considers Schumpeter’s famous ‘creative destruction’, where incumbent firms are most threatened by innovative underdogs. To retain market share against competitors, existing firms must also innovate. To do so, firms can leverage a rapid and consistently changing product cycle, under the guise of innovation. This constantly changing product line-up would be an effective strategy to defend against competition and is facilitated by today’s advanced manufacturing practices[3]. While frequent product renewal bears the cost of self-cannibalisation – the redundancy of older products, the cost of being usurped by a new competitor stands to be much greater.

It is in this framework where voluntary, ‘technological’ planned obsolescence exists. Instead of actual functional breakdown in a durable good, fashionable changes or staggered minor improvements and innovation attract repeat consumption. It would be the consumer who willingly chooses to replace their still-functional goods. A strong case for this would be in consumer electronics. While few iPhones are defunct within a year, Apple’s annual iterations tempt and tease consumers to upgrade to a better version. If you’ve ever wondered why the iPhone 3GS or 4S seemed like meagre improvements over previous generations, it isn’t reflecting a hiccup in the engineering department, but is instead a methodical pace of planned obsolescence. It is this slow but steady self-cannibalisation which is sufficient to maintain strong sales and minimise market share erosion. Competitors like Samsung, Nokia and HTC all follow suit, consistently iterating on their products not only to capitalise on our desire for the nouveau, but to prevent getting trumped by their rivals.

Of course, not everyone willingly runs on this product-cycle treadmill. This consumerist approach, while agreeable and comfortable for an affluent end-user, has had strong implications for the environment. The unsustainability of insatiable consumerism weighs heavily on the minds of some, who are all too aware of the consequences of such behaviour. Those who defend it however, say that economic prosperity hangs on this ceaseless consumption, and that to fight back is thoroughly regressive. In the article to follow, I hope to discuss the different attitudes towards planned obsolescence, and its implications for the macroeconomy.

[1] Jeremy Bulow, “An Economic Theory of Planned Obsolescence,” The Quarterly Journal of Economics 101, 4 (1986): 729-749

[2] Joseph Guiltinan, “Creative Destruction and Destructive Creations: Environmental Ethics and Planned Obsolescence,” Journal of Business Ethics 89, (2009): 19-28

[3] Viki Sonntag, “Sustainability – in light of competitiveness,” Ecological Economics 34, 1 (2000): 101-113