R&D Investment, Planned Obsolescence, and Network Effects

Abstract

We analyze a durable-goods monopolist's R&D incentive in a market with network effects. It is shown that if the network effect is strong, the monopolist underinvests in new-product R&D compared to the commitment level. This contrasts conventional wisdom that durable-goods producers exercise planned obsolescence by introducing new products too frequently. When the monopolist can additionally invest in the intensity of network benefit, it tends to underinvest in network intensity. This further reduces the investment in new-product R&D relative to the commitment level.