This project investigates consumer electronics markets for new durable goods such as DVD players, digital camcorders and digital cameras. Consumers in these markets often delay purchases in anticipation of future price decreases and quality increases while firms typically base their pricing strategies on the knowledge that this behavior exists. We study different important features of these markets to evaluate their implications for economic performance and policy. First, we examine the sources of the dramatic price declines that we typically observe in these markets. Focusing on digital camcorder and digital camera markets, we seek to determine the extent to which these declines are due to strategic pricing by suppliers, entry by new competitors, and exogenous cost declines. We perform this analysis by estimating the determinants of cost and using the estimates to compute pricing behavior under counterfactual environments such as a stable product mix over time. Second, we study how complementary goods markets evolve and create network effects. We are particularly interested in the success of the DVD market, which required production and sales of both DVD players and DVD titles. We identify the contribution of DVD titles to the dominance of the DVD standard, solving several econometric issues that have not been well-addressed in the relevant previous literature.
Our results bear on antitrust and regulatory policy towards these markets, the construction of relevant price indices, and related issues in marketing and management. Our research is also relevant for other researchers who estimate dynamic demand systems, study durable goods markets or study oligopoly interactions. Solving dynamic models of consumer demand and oligopoly supply is complex and, as a result, our solution methods are new and computationally intensive, and are of independent interest to researchers and analysts. As with our past projects, we will involve a large number of graduate and undergraduate students, training them in applied modeling, numerical techniques and parallel computer use, as well as more generally in good research practices.
