Dr Christian Kreiss, Professor of Finance, Aalen University, 10.Nov.2014
Contents:
1. Summary
2. The economic logic
3. Repairs made more difficult or more expensive
4. Lack of transparency and information
5. Expected useful life: planned or coincidence?
6. Prevalence and impact
7. The role of advertising
8. Who benefits?
9. The role of the economic sciences
10. Policy recommendations
11. References
Summary
This paper shows that large companies in competitive markets have a strong incentive to apply the strategy of planned obsolescence to boost profits. Planned obsolescence means reducing the expected useful life of products so that customers will have to make earlier replacement purchases. It is a strategy of hidden product deterioration or hidden price increase. It works only if markets are not transparent, especially if consumers have no information about the total cost of ownership. Most consumer markets of durable goods suffer from a lack of transparency and information. The impact of planned obsolescence on society and environment is considerable: Consumers lose approximately 7% of their purchasing power, energy and resources are wasted and additional garbage is produced. Main beneficiaries of this strategy are the few owners of large companies. This paper shows that the existing economic theory of planned obsolescence is based on unrealistic assumptions and hence leads to unrealistic results, impeding the introduction of appropriate legislation to this day. The paper recommends the mandatory introduction of a product label indicating key product information, an extension of the warranty period, the introduction of a minimum storage period for spare parts and reducing advertising by law.
The economic logic
Under planned obsolescence we understand the targeted, undisclosed reduction of the useful life of a product by the manufacturer, with the aim of triggering earlier replacement purchases by the customer. It is one form of hidden product deterioration. Related terms are built-in obsolescence, planned lifespan, planned life cycle or expected useful life.
If a customer buys a product, he is usually purchasing the use of the good for a certain period of time in the future. If the manufacturer reduces the life of the product without the price being lowered accordingly, the effective price of use goes up. Such a hidden price increase has the advantage that it is not as easily recognised by the buyer as an open price increase, because it often takes years before one notices it.