Planned Obsolescence and the R&D Decision

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