When do firms sell high durability products? The case of light bulb industry

Abstract

This study empirically investigates firms' incentives on the choice of product durability, and its social optimality, by developing a dynamic structural model of durable goods with forward-looking consumers and oligopolistic multi-product firms. Based on the observations of the light bulb market, it specifies a model where firms produce multiple products with different durability levels and set product prices based on dynamic incentives. It proposes and applies novel estimation algorithms that alleviate the computational burden and data requirement for estimating demand and marginal cost parameters of dynamic demand models. Using light bulb market data in Japan, structural parameters are estimated. This study obtains the following results. First, large firms have incentives to collude to eliminate high durability incandescent lamps, though it is profitable to sell them for each firm. In contrast, when they can collude on prices, they don't have incentives to eliminate high durability bulbs. Second, eliminating high durability incandescent lamps leads to larger producer and total surplus, though it leads to lower consumer surplus.