The Design of Durable Goods
Coauthor(s): Oded Koenigsberg, Ricardo Montoya.
The use of a durable good is limited by both its physical life and usable life. For example, an electric-car battery can last for 5 years (physical life) or 100,000 miles (usable life), whichever comes first. We propose a framework for examining how a profit-maximizing firm might choose the usable life, physical life, and selling price, of a durable good. The proposed framework considers differences in usage rates and product valuations by consumers, and allows for the effects of technological constraints and product obsolescence on a product's usable and physical lives. Our main result characterizes a relationship between optimal price, cost elasticities, and opportunity costs of relaxing the upper bounds on the usable and physical lives. We describe conditions under which one or both of the usable and physical lives can take their maximum possible values. We examine why a firm that does not want to increase the usable (physical) life of a product might still invest in relaxing the associated upper bound on the usable (physical) life; when it might be able to cut price and at the same time increase the usable and/or physical life; and how it might be able to separate the manner in which it improves the product from the way in which it invests to reduce production cost.
Source: Marketing Science
Koenigsberg, Oded, Rajeev Kohli, and Ricardo Montoya. "The Design of Durable Goods." Marketing Science 30, no. 1 (2010): 111-122.