DEMAND FOR DIFFERENTIATED DURABLE PRODUCTS: THE CASE OF THE U.S. COMPUTER PRINTER MARKET

Authors

  • OLEG MELNIKOV

    1. Melnikov: Associate Professor, Department of Economics, Informatics and Management, Kharkiv Polytechnic Institute, Kharkiv 61002, Ukraine. Phone 38-057-737-2810, Fax 38-057-707-6601, E-mail osmelnikov@gmail.com
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    • This is a slightly revised version of the original 2001 unpublished manuscript. I would like to thank Patrick Bayer, Gautam Gowrisankaran, John Rust, Christopher Timmins, and especially my advisors, Steven Berry, Ariel Pakes, and Martin Pesendorfer for valuable advice and general encouragement. I have greatly benefitted from discussions with Eugene Choo, Philip Haile, Jerry Hausman, Günter Hitsch, Nickolay Moshkin, Katja Seim, and Nadia Soboleva. Seminar participants at Harvard and Yale provided many helpful suggestions. I am indebted to Mark Bates of PC Data, Inc. for providing the data without which this research would not be possible. I am grateful to Susan Olmsted for her help with administrative issues and to Anita Todd for her help with editing this paper. All errors are my own.


Abstract

This paper develops an estimation technique for analyzing the impact of technological change on the dynamics of consumer demand in a differentiated durable products industry. The paper presents a dynamic model of consumer demand for differentiated durable products that explicitly accounts for consumers' expectations of future product quality and consumers' outflow from the market that arises endogenously from their purchase decisions. The timing of consumers' purchases is formalized as an optimal stopping problem. A solution to that problem defines the hazard rate of product adoptions, while the nested discrete choice model determines the alternative-specific purchase probabilities. Integrating individual decisions over the population distribution generates rich dynamics of aggregate and product-level sales. The empirical part of the paper applies the model to data on the U.S. computer printer market for 1998–1999. The estimates support the hypothesis of consumers' forward-looking behavior, allowing for better demand forecasts and improved measures of welfare gains from introducing new products. (JEL L11, C35, D91)

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