Network Externality, Compatibility Choice, and Planned Obsolescence

Abstract

This paper attempts to provide a formal theory of planned obsolescence based on incompatible technologies in the presence of network externalities. The author explores how a monopolist's ability to make the new product incompatible with the old version of a product constrains the optimal dynamic behavior of the monopolist. The social optimum and the market equilibrium are compared. Finally, the possibility of quality distortion is considered as a commitment mechanism to the future compatibility choice. Copyright 1994 by Blackwell Publishing Ltd.