Firm Utilization of Perceived Obsolescence

Abstract

Perceived obsolescence has been displayed experimentally in many situations, but remains understudied theoretically. We develop a model of consumer demand, where firms aim to maximize their profit from consumers who enjoy network benefits from updated products. Firms face two key choices, pricing and whether to obsolete their product through introducing a new mod-el. In this paper, we demonstrate that perceived obsolescence can be an effective strategy for firms, but must be employed with caution. We then use our findings to derive several testable implications that enable businesses to determine for themselves whether perceived obsolescence can be a viable strategy for them. In particular, we categorize the key differences in optimal strategies between firms that sell products with network benefits, such as social media products, as opposed to those that sell status symbols, such as watches.