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

45 Pages Posted: 8 Nov 2008

See all articles by Weifang Lou

Weifang Lou

La Trobe University - School of Economics and Finance

David Prentice

Infrastructure Victoria

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: November 3, 2008

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.

Keywords: Discrete Choice, Demand Dynamics, Forward-Looking Behavior, Heterogeneous Preferences

JEL Classification: D12, D24, L63

Suggested Citation

Lou, Weifang and Prentice, David and Yin, Xiangkang, The Effects of Product Ageing on Demand: The Case of Digital Cameras (November 3, 2008). Available at SSRN: https://ssrn.com/abstract=1294926 or http://dx.doi.org/10.2139/ssrn.1294926

Weifang Lou

La Trobe University - School of Economics and Finance ( email )

School of Business
La Trobe University
Melbourne, Victoria 3086
Australia

David Prentice (Contact Author)

Infrastructure Victoria ( email )

530 Collins St
Melbourne, 3000
Australia

Xiangkang Yin

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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