ESSA

ESSA

Planned Obsolescence: Competition Against Longevity


Clement Wong

By

September 26th, 2012


Part Two in a series on Planned Obsolescence: How competition can withhold innovation.


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

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Christine

    Excellent article, thanks for writing this. You wrote that ” With imperfect competition, the firm has to not only consider its own production quantities over time, but also their competitor’s actions.” It;s also interesting to note that consumer demands, at a microeconomic level, are also fuelled by competition – while “Competitors like Samsung, Nokia and HTC all follow suit” in pushing more fashionable and apparently “innovative” designs, we all follow suit from our friends and family’s new purchases. We create our own cycle of repeat consumerism, because the standard is to upgrade, upgrade, upgrade. So planned obsolescence really is a two-way street…

    • Clement Wong

      Thanks, Christine. Certainly, the regularly refreshed product cycles are only successful because consumers are willing to be enticed to upgrade. Some resist the urge, but few can really say they’re immune to the latest and greatest products.

  • http://menghusblog.wordpress.com/ Meng Hu

    Sorry, but this is really not true. In the article you linked, you write :

    “Light bulbs were deliberately made more fragile, and competitors would be closely monitored (and if necessary, fined) to ensure strict adherence to product degradation.”

    But according to the Report on the Supply of Electric Lamps…
    http://webarchive.nationalarchives.gov.uk/+/http://www.competition-commission.org.uk/rep_pub/reports/1950_1959/003lamp.htm

    “125. The main factors in the design of a filament lamp are its life on the one hand and its luminous efficiency, i.e. the amount of light per unit of power (watt), on the other. A lamp designed to give high luminous efficiency has a shorter life than one designed to give a lower luminous efficiency and a long life ; in other words, an increase in the life of a lamp can only be obtained at the expense of efficiency. The cost of production of the lamp would be much the same whatever the life. For ordinary lighting, therefore, the relative importance of luminous efficiency and of long life (from the consumer’s point of view) depends on the relative costs of replacing lamps and of power. Where power is relatively expensive it is more economical to use high efficiency lamps and vice versa. In practice a single standard only of life has been adopted both here and in many other countries. The current B.S.I, specification for ordinary lamps, No. 161, lays down a minimum life of 1,000 hours and minimum values of luminous efficiency. The life of 1,000 hours is adopted as a standard in many countries though the United States adopts a lower figure for some ratings; it has been used in the United Kingdom since 1921, during which period the luminous efficiency has been substantially increased. Any figure chosen must be a compromise as the cost of power to different classes of consumer varies considerably and there is, therefore, no single optimum.* Some commercial users, however, have told us that they obtain longer life by “under-running” lamps (i.e. using lamps designed for, say, a 240 volt system on a 230 volt supply), particularly in positions where the cost of replacing lamps is considerable.”
    (chapter 9)

    “It has often been alleged — though not in evidence to us — that the Phoebus organisation artificially made the life of a lamp short with the object of increasing the number of lamps sold. As we have explained in Chapter 9, there can be no absolutely right life for the many varying circumstances to be found among the consumers in any given country, so that any standard life must always represent a compromise between conflicting factors. B.S.I, has always adopted a single life standard for general service filament lamps, and the representatives of both B.S.I, and B.E.A., as well as most lamp manufacturers, have told us in evidence that they regard 1,000 hours as the best compromise possible at the present time, nor has any evidence been offered to us to the contrary.”
    (chapter 17)

    It is, then, very plausible that obsolescence, far from being deliberate and provoked, simply reflects the change in consumer’s preference. Furthermore, this study by Hamilton suggests that competition enhances the durability of cars.
    http://www.rff.org/RFF/documents/RFF-DP-98-20.pdf

    I have no reason to think that the so-called planned obsolescence can be induced by competition. No. If planned obsolescence exists, it would be in a context of a market under restricted competition. And even in this condition, it is not really certain that planned obsolescence would be a lasting phenomenon.

    Think about it. If firms planned to degrade their products, this means that their demand for factors of production will automatically increase. Then, the prices of those factors will also increase, leading to an increase in costs of production. Not in profit. The prices of those factors would not increase only if there is an increase in savings allowing a decline in interest rates and, thus, making the credit cheaper. However, this also means that the private consumption would decline rather than increasing.

    • Clement Wong

      Some very interesting insight, Meng Hu.

      While I can understand that there’s a trade-off between luminance and efficiency, such that some light bulbs have shorter life spans for different applications, that in itself does not invalidate the existence of the Phoebus cartel. The documents outlining the agreement between the cartel, along with their coordination in reducing durability in tandem over the years are clear proof that they had ulterior motives. As for light bulbs sold today, I don’t really have any evidence to suggest that collusion is taking place to undermine durability, but it is interesting to examine the historical case.

      With regards to Hamilton’s study, and for competition’s effects on good durability in general, I would argue that there is no hard and fast rule. While Hamilton makes a strong case for competition increasing durability in the automobile market, it would be unsafe to assume the same for other durables as well. My intention was to highlight the possible ways that imperfect competition can incite more planned obsolescence, and I believe that both Bulow and Guiltinan provide noteworthy theoretical frameworks to explain that possibility. I’m certain that while in some product categories, competition can have the tendency to improve durability, there are many other markets where durability is negatively impacted by the behaviour of competitive firms. The nuances of each market might contribute in determining which effect we see.

    • Kentoucky Windage

      Thanx man for nice sources… such a relieve .. was thinking that sources are death dated….

  • http://menghusblog.wordpress.com/ Meng Hu

    Thanks for your reply.

    When you say,

    “it would be unsafe to assume the same for other durables as well”

    I do agree. A shortening life for t-shirts is of no comparison with a shortening life for, say, refrigerators. But while your point is cetainly true, I find it difficult, if not nearly impossible, to distinguish between “planned” obsolescence and “technological” obsolescence in most cases. Even if planned obsolescence really exists (and it is true that there is empirical facts, with the epson chip inside your printer, your machine will break after a predefined number of printed pages, which has been demonstrated in one of the references – “The Light Bulb Conspiracy” – you have cited in another article, even though it is plausibly an exception rather than the rule) I think we should investigate whether this can be a widespread phenomenon, and more importantly, a lasting phenomenon. If such strategies do not earn any profit, I see no reason for that.

    While I agree that the issue is a very difficult one, and needs further investigation, I think, on a theoretical grounds, that planned obsolescence should not be as widespread as described by some people.

  • thwap

    This series is BRILLIANT! Thank you Clement Wong!

Founding sponsors

 

 

Partner

Gold sponsors

 

 

Silver sponsors

 

 

 

 


Affiliates