industrial organization

Planned obsolescence (in parts)

Vincent Geloso Economics , , ,

In response to my post on planned obsolescence, some have pointed out that a good is composed of many different inputs. If there are differences in the quality of the different parts of a good, then it might be rational to reduce its lifespan.

That is a important possibility which I should have considered. Imagine that good 1 is composed of parts A, B and C whose lifespan are 1, 2 and 3 years. The manufacturer of good 1 will converge one the lifespan which, in relative terms, will maximize his profits. If it costs more to bring part A to the lifespan of part C than it is to bring part C to the lifespan of part A, then a lower total lifespan would be appreciable.  That decision reduces the lifespan and the marginal cost which means that a greater quantity of goods can be consumed than if we “over-engineer” by bringing A to the level of C. This point was brought to my attention by Michael Makovi, a graduate student at Texas Tech University’s department of agricultural economics. In his words:

The corporate executive types told the engineers: If one part of the product can last X years but the other part of the machine can last Y years, then under-engineer the longer-lasting parts so that the whole product uniformly lasts the lowest-common-denominator of time, so that when the product fails, the customer didn’t waste money on over-engineering other parts of the product to last longer (…) engineers balked because it seemed immoral, but the executives assured them that it was in the customer’s own best interest. For example (…) if one part of your refrigerator lasts 10 years but another part lasts 20 years, and if the 10 year part cannot be replaced, so you have to replace the whole refrigerator at once, then over-engineering the other part to last 20 years is a waste of money.

Mundane economic speculations: Oil changes

Rick Weber Liberty , , ,

Fair warning: this post isn’t about anything in the news, or even anything particularly liberty related. This is just some economic musings about the motorcycle I just bought. I feel pretty darn free when I ride it, but ultimately this post is just (“just”) economics and just (again with that “just”) for fun.

When I got my bike, the mechanic I bought it from suggested that I get the oil changed every 3000 miles. The owner’s manual suggests 8000 miles. The first number feels a bit like when you leave the dentist’s office (“We’ll see you in two months for your next check up!”). It’s obviously in my mechanic’s interest to have a steady income, and an oil change is an easy job. On a machine that can be replaced for $4000, it’s a much more certain income than if I trash the engine and just buy a new bike. So is he just profit maximizing?

What about Honda’s number? What do they want? If they wanted my bike to last forever, they might say something like 3000 miles, but they also want me to buy a new bike at some point. But that isn’t all they want. They want me to enjoy my bike enough that I buy another Honda. And they want a reputation for selling reliable machines. And they want a healthy used bike market to bring in new riders (like myself… I bought a used Honda Shadow). On the one hand they want my bike to eventually die, but they want it to go in such a way that I’ll go back to them for my next bike. On the other hand, they want their bikes to last longer than their competitors. So it’s some form of oligopolistic competition on a non-price margin.

If it’s a Cournot-Nash equilibrium (and all manufacturers have about equivalent quality), then by suggesting 7000 miles their bikes would last longer, bringing new riders to the Honda fold, but reducing demand for new Hondas. If they suggest 9000 miles, riders will need new bikes sooner, but reduced longevity would reduce demand by a greater amount. The implication: I should change my oil more frequently than 8000 miles.

If it’s a Bertrand equilibrium, then they’ll give it all away to the consumer implying that 8000 maximizes my experience. But then competition among mechanics must be Cournot (unless the conditions in Lubbock are really awful)! When I took my industrial organization class, as a young libertarian economist-in-training, Bertrand was appealing (“companies always have our best interests at heart! See, they strive for the lowest price by assumption!”), but not terribly compelling. There are two lessons here: 1) Bertrand is taking the easy way out of our critics’ questions and will hurt us in the long run (take note fellow econolibertarians!). And 2) static/neoclassical economics, useful though it often is, doesn’t get us far enough: study your Austrian economics!