IO Seminar (Rysman)

Original article (link) posted: 04/11/2005

Gowrisankaran and Rysman "Dynamics of Consumer Demand for New Durable Consumer Goods"

The paper proposes a dynamic model of consumer preferences for new consumer durable goods and estimates it. Consumers in their model are heterogeneous. They are assumed to choose between purchasing a current product and waiting for future products, making rational forecasts about the future distribution of prices and qualities. Two actual industries, DVD players and digital cameras are estimated.

The model seems to be attractive because it examines dynamic aspects and heterogeneity of consumers that have not been done successfully in the literature, although everyone agrees the importance. I am bit wondering if incorporating the uncertain of the future markets has serious effects to the estimated results or not. In their model, consumers fully know when and what kind of products will appear. However, if the future market is uncertain in the sense that consumers only know the probability distribution of future products, there might be an additional waiting value. That is, consumers may be better off by postponing their purchase to resolve uncertainty. This option value of waiting is known as "Real Option" in finance. In real world, the arrival of new products typically depends on the result of R&D investments which is presumably stochastic. So, even firms cannot exactly know the schedule of future products in many cases. Therefore, to incorporate future uncertainty is an important extension I think.