Friday, 4 April 2014

The Man in the White Suit: Built- in obsolescence

Russ Roberts is brilliant as usual.

Yet another very popular argument made by non-economists that economists don't believe.

When I started teaching in the 1980s, students were more prone to believe in the idea of what was called planned obsolescence--the idea that companies designed their products to wear out quickly so that they could sell more of each item. You would hear it about lightbulbs, women's stocking, and cars. For example, people would say that manufacturers of stocking know how to make stockings that don't run--that get holes in them--but they don't sell them because they couldn't sell as many pairs. The planned obsolescence argument is enshrined in at least two movies--The Man in the White Suit and Tucker--movies about employees who are harassed or ignored by their employers because they make a product that lasts "too long" or is simply too good a product and will thereby reduce sales.

So why is this wrong?

The planned obsolescence argument is flawed for two reasons. The first is that even a monopolist can potentially make more profit selling products that last longer as long as people prefer longer-lasting products. The planned obsolescence argument ignores the price you can charge for a longer-lasting product. If you could make a lightbulb that never wore out or stockings that never ran, you could charge a higher price for two reasons--there's more value because it lasts longer and you save the customer the hassle of getting up on the ladder or finding the bulbs or shopping more often for bulbs. So you can charge not just double for a lightbulb that lasts twice as long but more than double because of the added convenience. So it comes down to the cost of innovating (and manufacturing). Time preference and interest rates can also play a role in the decision. But the basic argument that companies want shorter-lasting products in order to sell more is simply wrong because it ignores the price they can charge.

That's a monopolist. Under competition--meaning more than one firm trying to survive and thrive satisfying some want of customers--firms look for ways to get ahead. There are many ways--lower prices, better product, better service providing the product or selling it. Firms generally compete on all of these dimensions. If you foolishly try to sell more product by making it less durable, your competitors will eat your lunch. So the one word answer is competition. Competition encourages innovation. And if you stand still in an innovative competitive world you'll disappear. Explaining that fully does take a few paragraphs. And in the real world of lightbulbs, there is more going on--regulations, for example.