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How Do Households Choose Quality and Time to Replacement for a Rapidly Improving Durable Good?

45 Pages Posted: 13 Dec 2006 Last revised: 13 May 2014

Jeffrey Prince

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: May 27, 2008

Abstract

Many durable goods, particularly in the high technology sector of the economy, experience rapid quality improvement. As a result, replacement is typically due to obsolescence rather than breakdown, and replacement cycles are relatively short. When these goods are vertically differentiated, consumers must make two important, inter-related choices upon making a purchase: what quality level to buy, and how long to wait between purchases. In this paper, we analyze how these two decisions relate to underlying preferences and to each other both theoretically and empirically. We demonstrate how a single, tenuous assumption in a commonly used theoretical model can drive the relationships wed predict when we take this model to the data. This highlights the necessity of a more direct empirical analysis. In our empirics, we show that quality choice and replacement cycle length (RCL) are generally positively correlated. We also find evidence of non-monotonic relationships between quality choice and marginal utility of quality and RCL choice and marginal utility of money. That is, households who value quality more dont always buy higher-quality PCs, and households who value money less dont always buy more frequently, ceteris paribus. Our results provide new insights into the nature of durable goods demand, the proper characterization of markets and market segments, and welfare measures.

Keywords: Durable good, Personal computer, Vertical differentiation, Replacement, Cycle Length, Quality choice, Market Definition, Dynamic discrete choice, Identification

JEL Classification: L15, L63, O33

Suggested Citation

Prince, Jeffrey, How Do Households Choose Quality and Time to Replacement for a Rapidly Improving Durable Good? (May 27, 2008). Available at SSRN: https://ssrn.com/abstract=951001 or http://dx.doi.org/10.2139/ssrn.951001

Jeffrey Prince (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States

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