Publication: Durable-Goods Oligopoly with Secondary Markets: Theory and an Empirical Application to the Automobile Market
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2001-07
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Abstract
We examine the effects of durability on equilibrium producer behavior in the car market. In this setting, foward-looking producers take into account the effect that their current production decisions have on their current and future profits, due to the existence of a secondary market. First, we constructe a dynamic oligopoly model of a vertically-diffferenctiated product market to understand the equilibrium production dynamiecs which arise from the durability of the goods and their active trade in secondary markets. Second, we use data from the automobile industry to estimate a tractable linear-quadratic versión on this model. One result suggests that durability may be a particularly desirable car feature for high-quality car producers since, by overproducing today, they can exploit durability and the existence of decondaty market to potentially reduce their lowe-quality competitors future production: planned obsolescence appears to be a more profitable strategy for lower-end than higher-end producers.