Abstract: This paper explains the concept and origins of planned obsolescence and its presence in different types of economics markets. We see here that obsolescence is treated differently in each market by both consumers and producers, making its categorisation as a strength or a weakness difficult. This means that future policies directed at planned obsolescence need to take into account the kind of market they are exploring and design policies according to multiple markets and several goods within each market.
Planned obsolescence is the production of goods with short useful lives, leading to consumers being
forced to purchase certain goods repeatedly. Several kinds of obsolescence have sprung up into existence, especially post the Great Depression, known as Post-Fordist obsolescence, when consumer activity screeched to a halt. In order to increase consumer activity, producers shortened the lives of their products, so consumers would participate more actively in the market. This, in combination with the Industrial Revolution of a few decades prior, allowed more goods to flood the market at a faster pace. In order to sell products at the rate they could produce them, producers reduced the consumable lifespan of their products in different ways.
Types of planned obsolescence include producing a good with inferior products to decrease lifespan (contrived durability), permeating all stages of development. Other types of reducing the working life of a product is preventing repairs, making them prohibitively expensive, obsolescence programmed into a certain component of the development, systemic obsolescence and perceived obsolescence, where certain products are made to seem unfashionable and therefore undesirable.
Real life examples of this are highly prevalent in our society today. We see this in the world of fashion especially, where “fast-fashion” brands flourish in existence. In a world where goods are easily manufactured, supply must equal demand and therefore, fashions drift in and out of existence every season, forcing people to race to keep up with them in order to maintain themselves in a certain network or to enter a higher social sphere. Fast fashion brands (such as Forever21, H&M etc.) produce cheaper clothing directed towards those who buy new fashions every season. This clothing usually wears out in time for the next season, both in durability and fashion-wise, making it so that consumers once again have to purchase clothes in or before the next season in order to maintain themselves. Another strong contender for planned obsolescence today is the technology market. With the release of new versions of products almost yearly, there is pressure put on a consumer to keep up, especially if, as in the case of Apple, the company “throttles the speeds of older iPhone models in order to compensate for poor battery performance”. Such methods, as well as others that include non-detachable batteries, force consumers to repurchase goods, with no option of having the good repaired. Often, newer versions also force a consumer to make added, complementary purchases. Examples of this include wireless headphones to link to newer versions of phones released by Apple, software updates in order to allow laptops to function etc. Clearly, planned obsolescence by a firm is rarely ever restricted to one kind of obsolescence, but is spread out over several kinds to ensure higher profits for firms.
Different microeconomic systems e.g. monopolies, oligopolies, perfect competition approach this conundrum in different ways. A balance is required here between the price, which equals the present value of the future value of a good, for the consumer, and the cost for the producer, where efficient production for highest possible value struggles with future production that will only be funded if repeat purchases are made. Any producer must therefore reduce the price and
increase cost in order to produce a good with a shorter lifespan, as consumers will pay less
for a shorter life span of goods. In an imperfectly competitive market, this method is easier to
carry out due to either the absence of competitors or through collusion. Even in perfectly
competitive markets, planned obsolescence is carried out in order to keep up a continuous
flow of demand.
In Section 2, the basic monopoly model for when planned obsolescence is carried out is laid out. This section includes equations on when it is suitable for a producer in a monopoly to switch products and the reactions of the consumers. It also includes changes a monopolist can make and which could lead to the highest profits, due to a difference in valuations by the consumers. Section 3 branches out the basic monopoly model into a competitive model, by adding differentiated products provided by a greater number of firms. This section explores best responses in a competitive environment, where a price war can take place. Section 4 shows the effect of network externalities on obsolescence, where the utility a consumer derives from a good is dependent on the number of people already consuming the good, allowing a greater network size in a certain market to mean that more people will be attracted to that good, with the good itself having certain differences (i.e. basic versus premium) to differentiate people within the market. Section 5 concentrates on policies that focus on planned obsolescence around the world, current and proposed. Finally, Section 6 closes with some general remarks.
2. Obsolescence in a Monopoly
As mentioned before, planned obsolescence takes place in virtually all markets, though it may be easier to carry out in certain markets than others. Waldman (1993) creates a basic monopoly model in which planned obsolescence takes place. Here, due to the presence of two different goods being present in different periods of the model, the question of network externality affecting the decisions made by the consumers arises. This is explored in Katz and Shapiro (1986), where firms try to reach a price through the inclusion of network size, highest valuation of the sale and total unit sales of n firms.
Waldman follows a certain theory of Katz and Shapiro to determine the type of technology that can be adopted in varying circumstances. Here, Waldman begins his two-period model with the presence of one producer, two groups of consumers who join at different periods and two different varieties of technology available in periods . He assigns choices to the producer as well as the consumers, respectively whether to adopt the new technology and to switch to it. Here, we see that the monopolist does not adopt the new technology when the following scenarios hold true:
(1) VA > VB – c/2
(2) VA > VB – 2N
Here, V refers to the gross benefit received by an individual consuming either technology A or technology B. N refers to the total number of consumers over the two periods and c refers to the constant marginal cost of production.
However, the monopolist chooses to switch if the following conditions are met:
(1) VA < VB + (N – c)/2
(2) VA < VB – N
A monopolist makes several choices while releasing a new version of a product, especially as there is no competitor to which they can compare changes in style and content. These choices include those of timing, content changes and style changes. One can see that timing and content changes must work together. This means that the producer must make changes so that the release of a new version makes it so that the number of units sold of the old version decreases. Therefore, clearly the monopolist’s incentive to make the new version of the good as different as possible from the old version is very high. However, in a multiple period model, consumers are very likely to catch on to this method of the producer and therefore reduce their purchase of the old version if they believe it can last for some time. This is easier for the consumer to do if the monopolist releases newer versions too quickly. Therefore, if possible, a monopolist could segment their market such that they release the newer version of a product to certain consumers sooner than they release it to the general public. This allows for some time to create a need in other consumers for the newer version of the product, especially if they could be highly influenced by the “elite” consumer segment, whose social class they now wish to enter. A similar logic can work when changes to the style or appearance of a product are made, where the firm’s incentive to make stylistic changes to the newer version of a product is very high. However, the difference in valuations of stylistic changes between two different versions by consumers may be higher than the difference in valuations caused by content changes, due to the immediacy with which consumers can perceive differences between versions. This means that those with newer versions are immediately seen as belonging to a different and very possibly, higher social stratum than those with older versions. This causes other consumers to strive to catch up to those elite consumers, as is the case with content changes. However, in contrast to content changes, this is not due to necessity, but rather it is purely social. Moreover, whether the style is highly distinctive or not from the older product is immaterial as there continues to be a similar logic present, leading to the same conclusion. With respect to this reasoning, a monopolist stands to make the highest to lowest gains in the following order: high changes in style and content, high changes in content, high changes in style, and lesser changes in content and lesser changes in style. The difference in profits a producer can make in last two categories with respect to the older and newer versions depends on the level of changes in the style and content. If, for example, the change in style is merely a slight difference in a pattern, it may not be as highly valued as a change in content, if the lesser change in content is the addition of a new section in a textbook that holds an additional number of substitute equations. However, if the lesser change in content is a difference in the addition of only a certain equation while the lesser change in style is the addition of a new sticker, for example, which is more distinctive, the profits from the latter may be higher.
This order exists in such a way due to the combination of necessity and luxury present in most goods. If a good can fulfil both, consumers are more likely to buy it, especially if the changes are greater, because then the good is more needed to fulfil the consumers requirements as well as to mark them out as belonging to a certain class. High changes in content follows as there is likely to be a higher demand if the changes in content are large, since better products are necessary to carry out better work, especially when the older product falls into a state of disrepair. Post this, higher changes in style allow the producer to glean certain profits. However, here, the number of consumers demanding this product will be lesser, but it is possible that the consumers who do demand this product are willing to pay a high price for it, allowing the producer to sell units enough to break-even at least, if the above conditions are followed. Timing is highly important here, as the producer may have certain flexibility with regards to timing in the case of content, due to physical changes remaining constant and usually somewhat necessary. Additionally, little competition is present from other firms. However, purely stylistic changes do not allow for this, as the luxurious nature of these changes mean that constant changes are unneeded by consumers and usually require some content changes to be entirely marketable. Therefore, a stylistic change made by the producer needs to be released at a certain time, perhaps when there is a long interval between versions of a product or a new product.
An example of a monopoly market where planned obsolescence can exist is the publishing market. Most books, especially textbooks, are published by one house and any changes, or later editions, that are released of the book are released by the same company. Here, changes made in textbooks, such as the introduction of a new theory, for example, are usually important enough to academics to justify the need for a new edition when it is released. Thus, textbooks are usually held by monopolies that can release new editions at their will, knowing that there is a high likelihood the units introduced will be entirely bought up by their targeted market.
In his paper, Waldman makes several assumptions while laying out his model. The first one here is that each consumer purchases a unit of technology in each time period. This means that welfare is solely dependent on the technology being consumed, rather than the amount consumed. Additionally, consumers are assumed to be homogenous with respect to the value they attach to a product and its network externality, which cannot always be true, especially in markets where there exist more producers and social status accorded to certain goods by certain producers.
3. Obsolescence in Competitive Markets.
Waldman’s model looks at the presence of a single company, providing two different technologies in different periods. However, in the real world, competition exists within the markets for most goods, most of which have several producers. This leads to different versions of technology produced by various producers, with heterogeneous qualities and therefore, different ways for the consumers to choose goods across producers. It also leads to price competition amongst the various producers in order to be able to differentiate products according to price, as quantity competition is difficult to carry out in the presence of differentiated products. Here, there are several reactions a producer can undertake. The first is to reduce price in order to compete in the same way with one’s competition. However, this has the effect of reducing profits pro rata.
Another reaction is to split the market into different segments of consumers, attaching a certain type or “basic” good to a low-loyalty consumer while attaching a “premium” good or opportunity to high-loyalty consumers. A third is to react to the price changes with other measures, such as improved quality in certain aspects of the product (or improved quality overall), increase in promotion and thus, a perceived increase in quality. In addition to this, due to the overabundance of products and companies, there is a need for product differentiation within the market. This means that not only does every firm have to practice a certain degree of obsolescence in order to be able to keep up with the changes that other companies are introducing, it also means that obsolescence, usually a sign of weakness, in fact might become a sign of strength when the market in question is a competitive one as it shows the firm’s dedication to research, which leads to increased and possibly unobservable quality. Here, a good's durability might be traded with its quality – observable or unobservable. This is in contrast to definitions of quality earlier, where durability signified quality. In this way, competitive markets differ from monopolies where a monopoly’s incentive to practice research is limited as doing so reduces the future value of a current good and thus profits from a good at present. The same does not hold true with a competitive market framework, as a firm in a competitive market is required to reach a competing firm’s level of research in order to surpass it in the future in the same way or even to specialise in its own strengths. In a price war, therefore, we normally find a combination of all three methods within markets, with producers employing various methods in order to closely compete with their competition.
Network externalities are especially hard at work in competitive markets, due to the status attached to different goods within the society. Therefore, any reaction to a price war must take into account the ability to increase the network size of a good, not only across versions of a good, but across competing goods.
Grout and Park (2005) explore the idea of secondhand markets created due to obsolescence. Several equations in this paper can be used in order to realise the idea of market segmentation as mentioned before. In this model, goods differ in quality and this is information to which the owner is privy. Premium customers are often allowed to return older versions of products when newer versions are released, in order to be able to purchase the new version of the good at a lower cost. These newer versions often have additional attributes that are observable and have value and change over time, as even newer versions are released. However, even premium consumers who wish to switch out old models for newer models face a problem where they are unsure of the quality of the newer version, perhaps due to having experienced a similar problem while purchasing the older version. However, if the attributes of the new product are sufficiently superior to those of the older product, the owners of versions will be more likely to trade in their older products, whether they be high or low quality. Due to this, buyers in the basic market, who do not place a high valuation on the additional attribute brought by a newer version may actually pay a higher price for a version with fewer additions than versions with higher levels of additions. Moreover, due to this opportunity for switching, there will begin to exist a higher initial demand for models with the basic attributes in the market that the basic consumer segment frequents. , and that provide higher attributes cannot find a market even at the same price as the lower-at models. In this context the obsolescence is planned with the aim of enhancing the basics market, or rather, folding it into the firm’s own consumer base, rather than removing it completely and catering only to the premium market, which would result in an increased consumer base for the competing firm.
4. Policies
While planned obsolescence might usually be in the better interests of producers, the same does not hold true with consumers. Due to this, several policies have been passed around the world that aim to slow planned obsolescence by improving product durability, making sure longer consumer warranties exist, criminalising planned obsolescence if found and making sure spare parts and repair work is possible through incentivising it for manufacturers. Policies to address planned obsolescence are especially focussed on today in the European Union, especially in light of the emission and waste minimisation policy objective set by the EU.
The Ecodesign Directive of the EU sets mandatory requirements for the durability of certain products. Another indirect set of rules to make sure the consumer is aware of the lifespan of their product is to make it mandatory for the producer to label their product with the expected lifetime of the product. Moreover, in order to let the consumer discover defects at the time of purchase over time, especially as programmed obsolescence is usually a slow moving process, the burden of proof lies with the producer for at least two years, post which the consumer is held reliable for any breakdown of the product.
Different categories of rules exist for different products. In 2009, rules were passed to regulate vacuum cleaners within the EU, due to the fact that unlike other products, vacuum cleaners had become less energy efficient over time. The policies regarding vacuum cleaners state that the product must be taken off the market if certain requirements regarding energy (greater than 40,000 oscillations) and lifetime (greater than or equal to 500 hours) are not met.
Lighting, the area where planned obsolescence arguably first began, also has policies imposed units manufacture. However, unlike vacuum cleaners, these focus on durability, as not only do these aid in less energy consumption, but also aid the consumer in terms of cost. This leads to a more complex form of policies, due to the fact that durability can be measured in several ways, such as the gradual dimming of a lamp before it stops functioning entirely. Moreover, being part of the energy market, we know that rapid technological development is underway in this sector, even moving into integrating lighting systems and services, which requires separate software. This has and will in the future lead to several different kinds of lighting being available at the same time in the same market, with very different costs and benefits on a social scale. Today, policies state two different cases where products in lighting can be in violation of the code set for lighting, most focussing on lumen, or the light emitted from the lamp and the time it takes to warm up and then stay at the original level of brightness. The second case includes the average amount of time that is required for 50% of a sample size to burn out entirely, rather than slowly dim. In order to stay in the market, lighting is required to follow the following requirements: ‘lamp survival factor at 6,000 hours’ (with a 50% requirement at the first stage and a 70% requirement at the second stage); ‘lumen maintenance’ at 2,000 and 6,000 hours, respectively; ‘number of switching cycles before failure’; ‘premature failure rate’ at 500 and. 1,000 hours (maximum number of failure products in percentages); and ‘colour rendering’ for various applications. Here, colour rendering refers to how accurate the light given off by the lamp is compared to a reference light source. This does not include color consistency.* In addition, durability should be made clear and labelled when sold to consumers and properly investigated in each case. Energy Labelling makes sure that products from different firms are graded on a scale from A-E, allowing for products to differ in durability, without letting them fall below a certain standard. This allows each consumer to choose a product according to durability as well as looking at other factors. It should be mentioned here that a combination of mandatory standards as well as voluntary labelling is found to work best. Mere voluntary labelling cannot work in markets of well-established products such as lighting, due to the existence of free-riders, and moreover, the complex dimensions associated with lighting result in a high probability of cheating by producers, with claims of repairs being easily available being unverifiable within an appropriate span of time. However, voluntary requirements may be highly effective as producers would not want to be perceived as “lesser” compared to their competitors and thus lose consumers. In cases however, where the product itself is new and rapidly developing, it may be difficult to run checks over and over again, as there is no standard method of comparison with the past. In such cases, voluntary labelling by the producers may be carried out if suitable.
In certain member states of the EU, such as France, “techniques by which a person that places goods on the market seeks to deliberately reduce the lifespan of a product to increase the substitution rate” is punishable by up to two year s in prison and a fine of €300,000, which can be increased by up to 5% of the average annual revenue calculated on the basis of the three previous known annual turnovers. The amount should be in proportion with the benefits gained from the breach of the law. However, there are clearly certain downsides to this law, the first of which is the definition of planned obsolescence, which does not clarify the different kinds of planned obsolescence that can exist. Due to this, any ambiguity on whether a good’s short life span was due to programmed failures or incompatibility post release would favour the producer, especially since individual consumers are often hesitant to file cases. However, any wider definitions could result in confusion in addition to the already present confusion over the word “deliberately” in the definition of Planned Obsolescence, which can be easily covered up by producers who can claim different reasons fro a certain way of manufacturing a product. Other recourses are available to consumers, such as repairs of essential parts. However, this places consumers with higher end products at a greater risk as the additions they have paid for are not strictly required for the good to work. Moreover, even while unofficial shops are allowed to repair goods, allowing consumers cheaper options and smaller businesses to flourish, repair manuals are not made public by bigger businesses and consumers often stand to lose their warranties in such cases. This risk leads to bigger businesses continuing to benefit in a large number of cases.
France is several steps ahead of most countries however, in its creation of policies regarding planned obsolescence. A society, named Halte à l'Obsolescence Programmée (HOP; Translation: Stop Planned Obsolescence), provides legal counsel to consumers, raises awareness about durable goods and consult in the making of laws.
The various policies discussed here show the kinds of strategies that can be applied to promote product durability and reparability, directly and indirectly. However, it is clear here that in order to be able to carry out these policies effectively, the EU and its member states will need to work together. To avoid too many, perhaps contrasting policies amongst states within the EU, the Union will be required to lead in policy-making and implementation. Moreover, it is clear that all the policies are based on the idea that the market cannot guide manufacturers to develop more durable products. This may be due to the fact that individual consumers rarely believe they have the power to be able to request information from the producers and therefore, have little faith in the manufacturers’ abilities to shift the market towards their needs.
5. Conclusion
This paper has reviewed the several considerations any type of producers must account for when planning to reduce the lifespan of a product, as well as tried to take a comprehensive look at the policies developed by various governments to maximise social welfare, while analysing the gaps in the policies that are present in the world today. We began by recognising that planned obsolescence has long been part of our community and may continue to be, but late changes in the environment make non-durable goods hard to supply infinitely and therefore changes must be made in the markets that supply goods based around different kinds of obsolescence. This is rapidly becoming more difficult, due to the combination of rapid industrialisation and rise in the technology sector that is taking place. We see the downsides of planned obsolescence even in more competitive markets, where obsolescence could be a strength for consumers and producers as it increases the frequency of purchases, allowing consumers to avoid those producers they see as innovating less or producing goods of a lower quality. While it allows producers to research more and provide a better quality of goods to the public, it also means that at a certain point, the signifiers of the goods’ quality become unobservable to the general public. At this point, producers may introduce products with purely stylistic differences disguised as content differences or no differences at all. This results in a high degree of obsolescence, pushed higher through artificial means. Both industrialisation and the expansion of the technology sector require a steady flow of demand in order to maintain themselves and due to the rapid innovations taking place especially in the technology sector, it is difficult to limit the quantities and versions of goods produced without limiting consumer autonomy and utility.