Chapter 5
The Behavior of Firms
Author Commentary

Author Commentary 1. In the simple profit model presented in this chapter, firms produce a given good of a given quality. But in the real world, can firms increase profits by withholding high-quality goods form the market?


Planning for Obsolescence
Not everything should last forever.

When I wrote my first textbook, the publisher wanted to
combat the second-semester used book market by sewing a
$100 bill into the binding of every 100th book. Every student
would tear his book apart to see if he'd won. Printing with
disappearing ink that lasts exactly one semester would also
discourage the used book market. But instead of running
lotteries or using disappearing ink, most publishers make used
textbooks obsolete by periodically releasing revised editions.
Did I mention that the fifth edition of my textbook is forthcoming
next year?

The naive answer to why publishers might want to
discourage the used book market is that they prefer to get
paid every time a student buys a book. But by that logic, you
should never sell your house when you can rent it: Why get
paid only once when you could get paid every month? The
logic is wrong because the sale price is likely to be far higher
than the monthly rent. And the logic is still wrong when
applied to textbooks, because the sale price for a book that
can be resold is likely to be far higher than the price of a book
designed to lose its value.

If a student is willing to pay, say, $30 for a textbook, that
same student will be willing to pay $60 for the use of a
textbook that can be resold for $30 at the end of the
semester. (For the sake of simplicity, let's ignore the fact that
the $30 delivered a few months from now is worth a little less
than $30 delivered immediately.) And for a book that can be
resold twice, the second owner's willingness to pay $60
means that the first owner is willing to pay $90.

Now, if you're a publisher, is it more attractive to collect
$30 apiece for three books printed with disappearing ink or
to collect $90 for one book that's designed to last? As long as
it's cheaper to produce one book than three, the publisher
should opt for permanence.

That's why economists are generally skeptical about
allegations of "planned obsolescence." Every few years,
someone claims that General Electric knows how to make a
light bulb last 1,000 years but suppresses the technology to
keep us coming back for more light bulbs. Likewise, Ann
Landers is forever publishing columns about how pantyhose
are intentionally designed to run so women will need a new
pair every two weeks.

But a woman who buys a $2 pair of pantyhose every
two weeks has demonstrated her willingness to spend $52 a
year on pantyhose. If Hanes could make a pair that's
guaranteed to last a year, she'd buy it for $52. That would
be a better proposition for Hanes than having to make 26
pairs to collect the same revenue. So the Ann Landers
theory makes no sense.

Does that mean there's no such thing as planned
obsolescence? No, it means that planned obsolescence
occurs only under special conditions. Mistrust, for example, is
a special condition. If a publisher says, "Buy this book for
$90, and you'll be able to resell it next year for $60," a
student might well respond, "How do I know you won't bring
out a new edition next year and undercut my resale market?"
Unless the publisher can quell such doubts, students won't pay
premium prices for books with lasting value, so publishers
won't provide them.

(Students, of course, are in some sense a captive market,
forced to buy the books their professors assign. But there
must, nevertheless, be some upper limit on their willingness to
pay; otherwise, textbooks would sell for an infinite price. And
whatever the upper limit is, it will always be higher for a book
that can be resold than for a book that can't.)

In most instances of planned obsolescence, customers
have demanded it, and firms have provided it as a service.
Maybe you'd rather not spend $52 on a pair of pantyhose
that might get lost at the laundry. Or maybe you don't have
$52 in your pocket right now. By letting you buy 26 shoddy
pairs at $2 apiece, the manufacturer provides you with the
equivalent of either insurance (against the prospect of losing
your entire year's supply of hose at once) or a loan (by
allowing you to spread out your payments over an entire
year).

What brings all this to mind is the recent controversy over
Monsanto Co.'s development of infertile seeds--seeds that
yield crops that don't reproduce so that farmers have to buy new
seeds each year. From the farmer's point of view, the opportunity
to buy infertile seeds can be a great boon. Instead of paying $100
for seed that should last 10 years, you pay $10 for new seed
each year, which insures you against the possibility of a disastrous
and expensive crop loss.

(Are you worried that Monsanto would charge just as much
for the infertile seeds as the fertile ones? Don't be. Surely farmers
are willing to pay much more for fertile seeds than for infertile,
and you can be sure that Monsanto fully exploits that willingness.)

Many high-yield hybrid seeds are infertile, though not by
design. Like mules, they're naturally infertile. Taking its
lead from the software industry, Monsanto had planned to
convert this bug into a feature. But in the face of considerable
public pressure, Monsanto has agreed to stop developing
infertile seeds.

Much of the opposition had nothing to do with planned
obsolescence and everything to do with concern that the
Monsanto's infertility gene might "leap" from its seeds to fertile
seeds in adjoining farms and eventually render those fertile
strains infertile. Such hypothesized contamination is a
legitimate concern and quite plausibly a sufficient reason to
applaud Monsanto's decision. But an unfortunate side effect is
the lost opportunity to provide some socially desirable
planned obsolescence.

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