The Effects of Product Ageing on Demand: The Case of Digital Cameras

Lou, Weifang and Prentice, David and Yin, Xiangkang (2008): The Effects of Product Ageing on Demand: The Case of Digital Cameras.

Abstract

The static differentiated product demand model when applied to products with rapid product turnover and declining prices, yields implausible results. One response is to explicitly model the inter-temporal choices of consumers but computational demands require restrictive assumptions on consumer heterogeneity and limits on the characteristics included in the model. We propose, instead, to supplement the static model with a control for the age that each product has been in the market. This approach is applied to the US digital camera market and we find we obtain more plausible estimates. Our results are consistent with inter-temporal price discrimination by firms. Furthermore, our results suggest that ignoring the effects of product ageing may result in substantially overestimated price elasticities and technological progress and underestimated price-cost markups.

• Item Type: MPRA Paper
• Language: English
• Keywords: Discrete Choice; Demand Dynamics; Forward-Looking Behavior; Heterogeneous Preferences
• Subjects: L - Industrial Organization > L0 - General; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms; D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; L - Industrial Organization > L6 - Industry Studies: Manufacturing > L63 - Microelectronics ; Computers ; Communications Equipment

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