Built To Break

There is a problem with the free market and consumerism. You see, it is based upon increasing sales as much as possible. As soon as you sell something you want that same person to buy another product from you. You could do this by competing on price or quality, or you could build the product such that it either breaks down or goes out of fashion very soon. This process, known as Planned Obsolescence, is rarely discussed but quite logical and sensible.

Imagine I built a car that lasted for 50 years. This would probably be disastrous (for me). It would destroy the automobile industry and whatever company I worked for. Everyone would only buy one car and then the industry would be redundant. Instead imagine I built a car that lasted 5 years, half the time of most cars. I would probably do well as I would have a continuous stream of customers paying for repairs or buying new cars. Or if I designed it so that a 5-year-old car became unfashionable so that people would “upgrade” even if the car was in working order. My company would prosper and I could write myself a nice cheque. The lesson is to build things well but not too well.

I’m sure some of you can think of objections. Surely no one will buy defective cars? True, but nobody knows they’re defective. Hardly anyone knows anything about how a car runs and couldn’t tell the difference between a good or a bad car. Think about it, what do you know about cars? Could you name for me the highest and lowest quality cars? When people are buying cars, there is so much else to consider like price, colour, design, brand, space etc. Quality cannot be measured so it is ignored.

People also internalise their problems (and call it taking responsibility). If my car breaks, it must have been something I’ve done. Maybe I drove it over rough surfaces or shifted the clutch wrong or drove it too hard. Everyone else’s car is working so what did I do wrong? Unemployed people do something similar. They blame themselves not the system. This is why problems with a car can be so frustrating (especially for men). It is sometimes taken as a reflection of that person (broken, dodgy, not up for the job etc)

Guarantees and returns are meant to protect consumers but they don’t always work. For some products they can only be for a very short time. There are many loopholes companies can use to get out of repairing it. For example, if you hand a phone in for repair, the company will almost certainly claim there is water damage no matter what state it’s in. Returns are made as difficult as possible through long waiting periods. Finally, very few people try to get a broken product fixed. Part of it is due to internalisation (see above) but also it is in our nature to avoid conflict. We do not wish to argue with staff or imply their products are faulty (as though they would take it personally). It’s almost rude. Some of us feel we may come under suspicion for incompetent or mishandling the product (irrational guilt and fear is surprisingly common) Most people find the process too hassling or troublesome to go through with, so most faulty merchandise is simply thrown out.

People have a remarkable ability to adapt and accept their surroundings. People assume the current system is the “normal” way of doing things. So if people buy new iPods every 2 years, then they accept this as normal and don’t ask why they don’t last longer or why there needs to be a constant stream of new models. If cars break down often, then people will assume this and expect it to happen. Everyone seems to have accepted it as normal that fashion changes constantly and you have to spend constantly to keep up. Our throw culture of consumerism contributes to this. Shopping is considered a hobby and not having bought something recently is a sign of deprivation. We have a throw away culture where goods are dumped when they stop working. People consider it natural to buy a new version rather than have it fixed. In fact few repair businesses exist anymore.

An even more effective tool is fashion. As soon as you sell your product, bring out a new model. Make it shiner and you can convince people to buy the same thing twice. Take apple for example. What is the difference between the latest iPhone and earlier models? Or what is the point of the iPad mini? The product is essentially the same but the newer models make the old ones obsolete and uncool. Critics also point out that iPods scratch and damage easy, incentivising people to buy newer models. If something does go wrong with your iPod, you can’t easily fix it because it is designed so that it cannot be taken apart. So you must return it to be repaired, a process they deliberatively make as difficult as possible so that sometimes it’s easier to just buy a new one.

Have you ever seen how long a car can last? Have you ever run one until it could run no more? My family did and it lasted 14 years. By then it was a deeply unfashionable “banger” and almost an embarrassment (the only reason we kept was because I was learning to drive). Many people would buy a newer model after 5 years (though the recession has stopped this). In our society, status is hugely important and someone with an obsolete car might be obsolete themselves.

There are many examples of planned obsolescence. When light bulbs were first invented they had amazing lifespan. In fact there is a light bulb that is over 100 years old and still going. The problem is that it was too efficient. So light bulb companies came together to form a cartel. This Phoebus Cartel not only fixed prices and divided markets between them but it worked to reduce the lifespan of the average bulb from 2500 hours to 1000 hours. Printers come with a computer chip embedded in them that shuts the printer down after a certain number of uses even though it is still in working order. You can’t repair it; rather you must buy a new printer. Likewise it is discouraged to refill ink cartridges, the companies would prefer if you bought a new (and expensive) cartridge. Textbooks are another example with new editions coming out every year with only superficial changes. Video games too have constant updates and sequels making the old one obsolete (i.e. a new Fifa game every year)

For planned obsolescence to work you need an industry dominated by a small few firms (oligopoly). It works better if there are frequent return purchases. You need the consumers to be unable to measure quality or even understand how exactly the product works (asymmetric information), which is why so many examples come from the electronic technology sector. It helps if there are some social and fashion rules about this. Clothing for example is all about what’s cool and what isn’t and being ahead of the pack.

This is a story of perverse incentives. It is not in a business’s interests to make a perfect product but rather to make you keep buying theirs. They have an incentive to keep quality below maximum which in some cases can mean deliberatively building a product so that it will break down soon.

11 thoughts on “Built To Break”

  1. Interesting stuff.

    I could talk about this for hours, but I’ll leave a relatively short and simple comment for once. If you think that an industry is not very competitive, then ask yourself how it might be possible to improve the forces of competition (besides setting up a business of your own within it). In particular, is there anything the government can do?

    Any action the government takes necessarily involves some form of coercion: basically threatening to punish people who do the things it tells them not to do, or who don’t do the things which it tells them that they must do. The government is capable of imposing a monopoly or a cartel on consumers and it is also capable of attacking and breaking up those who achieve powerful positions in the market through legitimate means (so-called “natural monopolies”).

    Imposing a monopoly or a cartel on consumers is almost immediately obvious as something which is against the interests of consumers, and yet it is something which governments love to do on the grounds that consumers would make bad personal decision if they had the choice. Indeed, the State itself can be considered as the monopoly of all monopolies. On the other hand, when it suits them, governments also display a strong interest in hurting those companies (e.g. Microsoft) which gain positions of extremely strong pricing power in the marketplace, and yet who didn’t do so via any coercive means.

    In this latter case, they argue that the powerful player is making it impossible for anyone else to have a fair crack at the whip. Unfortunately, in this scenario, they don’t properly take into account the combination of network effects and economies of scale, if not sheer ingenuity, which are required in almost every case to achieve such a dominant position in the first place. Network effects and economies of scale are to the benefit of the consumer, you see, and attacking the dominant player doesn’t really do anything to help consumers. Forcing a company to reduce prices will almost inevitable mean forcing it to scale back on production to the point where marginal revenues at the lower price matches marginal costs, which means weaker economies of scale, which means a disproportionately reduced supply of the good in question to consumers and shortages compared to the prior situation. Smaller rivals. who simply don’t enjoy the same economies of scale as the larger company, will not be able to replace the missing supply at a lower cost.

    The grand lesson we should learn from thinking about these matters is that perfect competition is an abstract concept which exists nowhere in reality and should be abandoned. A more useful way of thinking about markets is as dynamic systems which are under constant flux. This flux is the outcome of ever-changing consumer demands and physical realities, and the constant entrepreneurial search for abnormal profits. The markets for mobile phones, not to mention tablets and laptops, are all new markets which did not exist within living memory for most of us. New inventions are eventually supplanted by more exciting and profitable discoveries over time, and activities which once generated extra-normal profits soon become mundane and uninteresting thanks to the encroachment of rival producers. I recommend the work by Israel Kirzner who wrote some great material on the market as a dynamic discovery process.

    1. I agree that a government monopoly probably isn’t the solution. However I think government regulation in some cases is. For example to solve the problem of defective products that are too complex for consumers to understand (eg cars) then the government could set up a quality standard that would provide this to consumers. This is the case in terms of pollution and with many household applications. There is a government quality control that gives each application a rating based on its energy use. Regulations like these would narrow the information gap between consumers and businesses.

      Your last paragraph is great. I completely agree that we need to ditch the idea of perfect competition and replace it with a dynamic model of a constantly changing world.

      1. This is a serious question: If consumers aren’t smart enough to choose a car, are they smart enough to choose a political party? Which mistake will have the more serious consequences?

  2. Rob,

    Unfortunately, I don’t think your argument holds water, especially not in the examples you provide. You aren’t asking WHY people buy these ‘defective’ goods. It’s not like they HAVE to, they can choose any number of alternatives such as taking public transport, moving closer to where you need to be or buying a better car.

    Providing this is a voluntary action, the customer can choose which option maximises his/her personal satisfaction and if a company does not cater to these desires then a profit opportunity will exist for someone else to come in and steal all their profits.

    The reality that, regardless of how much people whinge and moan they actually prefer paying less for worse products in a large number of cases, can be clearly seen in the airline business over here, where Virgin thought there was a market opening for a high-quality airline (given how much people complain about poor service these days) and are now losing money hand over fist. They were wrong: people seem to prefer low quality, low cost airlines to the alternative (obviously they really want a low-cost high-quality service but sunt pueri pueri).

    Now, if you wanted to look at this from a consumer’s perspective then you could talk about the potential for resultant inequality solidification, although Pratchett sums this up best: http://www.goodreads.com/quotes/72745-the-reason-that-the-rich-were-so-rich-vimes-reasoned

    Yours (also with wet feet),

    1. Howya Matt, long time no talk. I think you pay to much attention in our lectures. People are not the rational utility maximising actors as described. We make mistakes. We miscalculate and don’t always choose what is best in terms of personal satisfaction.

      People buy defective goods for 3 reasons.
      1) They don’t know its defective until long after they bought it and are more likely to blame themselves than the company. .
      2) People buy things because they’re cool or popular regardless of whether or not their useful or an improvement on earlier models eg Apple
      3) This is more prevalent if there is limited competition and less frequent rebuys

      The Pratchett quote is brilliant and I was actually intending on doing a future post on that topic, that its expensive to be poor.

      1. Those reasons work on the individual level but not on the aggregate; if one product is better than another then over time the firm selling the rotten product will go out of business barring government intervention. Buying things because they’re cool is a benefit, you get to feel ‘hip’ and ‘happening’ and all the other things that the kids are saying these days. Remember, you aren’t comparing apples with apples, more like apples with Apple. Each product has different features (as you rightly say, most of the markets you describe will be oligopolies), so isolating a single one as the root of why people buy it is impossible given verying preferences.

        I take your point about infrequent purchases, there isn’t an opportunity for learning. But again, it’s an individual problem not an aggregate one: if Ford sell cars which fall apart after a couple of years then the initial buyers will get burned but over time Ford will get a reputation for selling crap cars and their sales will suffer (or not, as the case may be) as a result. This actually happened in the 70s and 80s; Japanese car firms had awful problems selling to Europe as their cars tended to rust very quickly in the slightly soggy climate. The big manufacturers got their act together, produced a better product and now sell boatloads in European markets. Meanwhile, Rolls-Royce sell almost no cars in Europe; which is partly by choice (to maintain the exclusivity of the brand) but also partly because when given the choice between an excellent, but expensive car or a servicable and cheap Toyota, lots of people will prefer the Toyota for various reasons.

        1. To the contrary, most of macroeconomics (rightly or wrongly) is based on micro foundations. In fact this makes sense as the collective is merely a group of individuals. Inefficient products may not necessarily go bankrupt for the reasons I mention above, its quite possible for them to stay around for a long time.

          Your point on fashion providing utility, while true, is really an explanation as to why consumers may be satisfied with inefficient products.

          On the Ford example, would you agree that up until competition from Japan, consumers were stuck with inefficient products? So it is less of a question over the validity of the theory but rather over which time and place it applies to? Even still inefficiencies may continue in the short run. Would you be reassured if I told you that while today’s products may be crap, in a decade or two a new company will make better quality products? As Keynes said in the long run we are dead, what counts is the here and now.

          The main point is that reputation is a fickle and variable factor. It is easily manipulated by rumour, advertising and unrepresentative examples. One friend may tell you a horror story about a product, but is the problem with them or the product? Likewise I have received recommendations from friends for useless goods.

  3. I find it actually rather alarming that, in a time of dwindling economic and physical resources, vested interests are conspiring to ensure perpetual consumption against the consumers’ best interests. I think this is a case in point for the case that there is no “free market” in the true meaning of the term: cartels, monopolies or outside intervention are inevitable outcomes.

  4. If firms’ production costs exceed the revenue generated at the market’s price, they don’t produce it – plain and simple. Cars with 50 year lifetimes aren’t produced because 1) demand is lacking and 2) their production costs exceed forecasted revenue.

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