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Planned Obsolescence

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When I was young, there was a lot of talk about "planned obsolescence," especially in the automotive industry.

The idea was that the Detroit Big Three (who dominated the auto manufacturing world in those distant days) were deliberately creating cars that would wear out in four to five years and need to be replaced. This was understood to be both rational and predatory behavior, a sign of how buyers and sellers are necessarily at odds. Because how could makers not want repeat business? And how could motorists not want long lasting vehicles?

Nobody uses that expression any more today. Perhaps the theory now seems somewhat silly. The duration of cars has significantly expanded since the days when that expression was a thing. And the Cubans have demonstrated throughout the Castro era that it is perfectly possible to keep even 1950s era Detroit vehicles on the road in working condition into the second decade of the 21st century. How? Did the "planning" go wrong, or was it never directed as the cliche implied in the first place?

The underlying idea seems to involve hidden assumptions about interest rates.   Suppose I make a product (just call it an 'x') that lasts three years. Smith, my actual or potential competitor, has a design on the drawing board for a product that will do everything my x does, but will do it for six years.  The implication of the cliche is that t I approach him and say, "Don't ruin a good thing. Why don't you keep your product life down to three years, and we'll both get return business?"

But he has prepared to sell something that will be valued by the public more highly than what I am selling. The market could very well have room for both of us; the low-priced x and its higher priced but longer-lasting cousin. It isn't obvious my proposal would be riveting to him.

Now, you object, he'd have to charge a much higher price than mine, since his revenue is in effect going to have to last him twice as long product-for-product. Wouldn't that higher price have to be twice as high?

No. Just as an arithmetical matter, his income stream will be at parity with mine so long as the premium he charges is enough for him to buy bonds with it, such that the income from those bonds plus the principal he's already earned will add up to the price of that second x, the one he is not going to be selling at the start of year 4.  Of course he'll want low-risk bonds for this purpose.

My conclusion: planned obsolescence is a theoretical possibility that becomes more likely the longer interest rates are kept low by central bankers, for in that environment the longer-lived products may become less likely to pay for themselves.


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