A Dynamic Model of Consumer Replacement Cycles in the PC Processor Industry

Abstract

As high-tech markets mature, replacement purchases inevitably become the dominant proportion of sales. Despite the clear importance of replacement, little work examines the separate roles of adoption and replacement. The analysis is complicated by the fact that a consumer's decision to replace a product is dynamic because high-tech markets undergo both rapid improvements in quality and falling prices.

To address these issues, I develop and estimate a dynamic consumer demand model that explicitly accounts for the replacement decision when consumers are uncertain about both future product price and quality. Using a unique data set from the PC processor industry, I show how to combine aggregate data on sales and product ownership to infer replacement behavior. The results reveal substantial variation in replacement behavior over time, and this heterogeneity provides an opportunity for managers to tailor their product introduction and pricing strategies to target the particular segment of consumers that is most likely to replace in the near future.