Product Durability and Moral Hazard

Product Durability and Moral Hazard Previous durability studies conclude that a monopolist that sells output without any commitment ability will tend to produce output with lower durability than a monopolist that rents output. This paper demonstrates that this conclusion depends critically on the degree of moral hazard (possible damage to output) faced by renting firms. When moral hazard abuse or neglect is introduced in a durability model it is shown that a renter may manufacture output with lower durability than an uncommitted seller reversing the conventional obsolescence result. However, the analysis indicates that, unlike the seller's commitment problem, the presence of moral hazard in rental markets does not cause a failure of the independence of durability and industry structure. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Industrial Organization Springer Journals

Product Durability and Moral Hazard

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1997 by Kluwer Academic Publishers
Subject
Economics; Industrial Organization; Microeconomics
ISSN
0889-938X
eISSN
1573-7160
D.O.I.
10.1023/A:1007799732257
Publisher site
See Article on Publisher Site

Abstract

Previous durability studies conclude that a monopolist that sells output without any commitment ability will tend to produce output with lower durability than a monopolist that rents output. This paper demonstrates that this conclusion depends critically on the degree of moral hazard (possible damage to output) faced by renting firms. When moral hazard abuse or neglect is introduced in a durability model it is shown that a renter may manufacture output with lower durability than an uncommitted seller reversing the conventional obsolescence result. However, the analysis indicates that, unlike the seller's commitment problem, the presence of moral hazard in rental markets does not cause a failure of the independence of durability and industry structure.

Journal

Review of Industrial OrganizationSpringer Journals

Published: Sep 29, 2004

References

  • Market Structure, Durability, and Quality: A Selective Survey
    Schmalensee, R.

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