The Pricing of Consumers' Durables

Abstract

The tutility of consumers' durables to the buyer stems primarily from the services which he expects to enjoy over a number of successive budget periods. Althouigh the services are a time flow, the for the durable itself cannot be represented by the usual Marshallian flow functions of static character. The models which take the place of the traditional demandsupply scheme are of dynamic character even if the function of price as clearing the market is preserved. The notion of excess demand governing price changes adds a further dynamical element. SINCE THE publication of The General Theory, attacks on the Marshallian scheme of price determination by supply and have gradually increased in intensity, although the scheme still dominates the textbooks. From stress on liquidity preference, the accent has shifted to substituting for Marshall's idea of current purchases as a function of price (flow demand) the notion that there is a stock of assets desired by income receivers which is a function of price. For the theory of interest this point was made in the pioneering article by Scitovsky [15]; later has applied this idea to the pricing of durable goods, i.e., goods which render their services in consecutive periods of time' and are not consumed uno actu: it is not the current purchases of durables, but the stock of durables desired by consumers for use which is a function of price. The stock-demand approach was originally not based upon econometric analysis of whether the new stock-demand model would work better than the flow model in explaining price observations. Like the traditional theory, the new approach was based on common experience interpreted by introspection. In this paper, which undertakes to revise and develop the earlier approaches, we shall adopt this method of armchair theorizing, although we are fortunately able to refer also to recent econometric investigations supporting our particular approach. Of course, no complete survey and examination of all pertinent econometric models is possible here. We start by sketching briefly the basic difficulties of the stock-demand approach as it was originally formulated. To the stock-demand approach