PLANNED OBSOLESCENCE AND THE RESEARCH-AND-DEVELOPMENT DECISION

By investing in R&D, a durable-goods monopolist can improve the qualit y of what it will sell in the future, and in this way reduce the futur e value of current and past units of output. This article shows that i f the firm sells its output, then it faces a time inconsistency proble m; i.e., the R&D choice that maximizes current profitability does not maximize overall profitability. The result is that if output is sold r ather than rented, then in its R&D decision the monopolist has an ince ntive to practice a type of planned obsolescence that lowers its own p rofitability.