Durable Goods

Durable Goods - Defining

Durable Goods or Durable Products or Hard Goods are products which are either consumed and used or disposed and destroyed after serving usefulness for a long period of time in future.Durables consumption change according to the market.

Wednesday, 9 February 2011

Merging With Durable Goods

Merger analysis requires an assessment of the extent to equipment was not likely to sustain collective dominance).The market for tractors provides a good illustration of the constrained after the merger. In durable good industries, significance of durability. First, the rate of depreciation is an important factor can be the potential for the existing relatively low for tractors: our econometric estimates based stock of used machines to act as a constraint on the on new and used equipment prices suggested an average behaviour of new equipment manufacturers. Should we depreciation rate of only about 8% in Europe. Second, data worry less about a merger when the product is “durable” - used to forecast the sale of used tractor parts indicated that is, when it has a long useful life. Third, the demand for new tractors has been in long-term decline (tractor sales in the Durable products stay around a long time. Much machinery EU have declined from over 300,000 units per year in the and industrial equipment is designed to last, and its useful late 1970s to around 175,000 in 1998). The long-term life can often be stretched through increased maintenance. decline in the demand for new tractors is expected to Many products have a lively second-hand market. What continue, suggesting there will be ample availability of used would happen if manufacturers of durable new equipment.

Against this background, we estimated that the value of key characteristic of durable goods is that they provide stock of used equipment in service is large relative to new a stream of services over an extended period of time, often equipment, even when such calculations are based on the long after the sale. It is these services which their buyers depreciated value of used equipment (not simply the ultimately value - a machine allows a flow of production number of pieces of equipment in service). Taking into services over time; a vehicle gives a flow of transport account age and depreciation rate, we found that the services, etc. Once a durable good has been sold, the depreciated value of the stock of used tractors in Europe is supplier has very limited control over the services which a large multiple (as much as 11 times) that of new tractor that good produces (essentially only through its spare parts sales. This large stock of available used equipment
policy). In future years, these services will effectively suggests that attempts to increase the price of new tractors provide competition to the sales of new durable goods - would require a very large reduction in sales - basically, future buyers can decide whether to purchase a new because new tractor sales account for only a small machine, or whether to achieve the same (or similar) effect proportion of the total “stream of services” derived from by making use of an existing machine which is already in tractor use each year. The greater the required output the market (at least if there is no major technical change)restriction in order to achieve a given price rise, the less likely the price rise is to be profitable. If the price of the new good rises, customers may be able to use their existing equipment more intensively,Further, tractors are not used very intensively in
extend its life, perhaps by spending more on maintenance.The average annual usage is 750 hours, which suggests Customers who would previously have considered buying a considerable scope for more intensive use. There is also new good might instead buy a slightly less new, second- clear evidence that demand is very sensitive to farm hand one. The existence of a stock of used goods - income, which suggests that the timing of purchases is not whether in operation or sitting on dealers’ lots - can thus driven purely by the age of the equipment, but rather that increase the elasticity of the demand facing new equipment farmers have considerable discretion in choosing when to manufacturers, and reduce the attraction of post-merger buy a new tractor (our estimates suggest that a 1% decline price increases. This has the potential to reduce the
in real net income per farm is associated with a 2.5% market power enjoyed by durable goods suppliers, and 1decline in sales of new equipment) hence may affect the merger analysis.Markets for second-hand tractors are well developed, and the case of agricultural equipment sales of second-hand tractors in each year are between the recent New Holland/Case merger (Case No. IV/M. and 3 times sales of new tractors. Moreover, there are 1571) between producers of agricultural equipment is an relatively few customers in this market with strong example of a market where the constraining effects of an preferences for new goods. 

Information on a sample of the existing stock of goods were highly plausible, although the sales of new and used tractors between 1996-98 for which European Commission’s Merger Task Force cleared the financing was obtained, suggest that relatively few farmers merger on more conventional grounds (it concluded that exclusively purchase new equipment. Among farmers who the market share distribution in the supply of new purchased multiple tractors between 1996-98, including at least one new tractor, nearly 60% also purchased a used tractor. Significantly, the price of new and used tractors were also highly correlated, suggesting that they compete in the same market.

1. The pricing of durable goods in general - whether by a monopolist or by competing suppliers - has been extensively analysed.

2. Economic literature (much of it focusing on suppliers’ and customers’ New Holland and Case ranked respectively in first and fourth place
incentives for making a sale/purchase today, as opposed to waiting). in the sale of tractors in Europe.

The need for pragmatism A contrast: commercial aircraft

However it would be wrong to infer from this example that It is instructive to compare the case of agricultural the stock of consumer durable goods will always be able to constrain equipment with the 1997 Boeing/McDonnell Douglas new good prices. There are circumstances in which the merger in commercial aircraft. The durable good argument used stock clearly is not equivalent to a competitive supply. was advanced at the time by the merging parties, but in Sometimes the stock is almost completely utilised and the our view a close empirical analysis showed that the ability to extend its life or use it more intensively is limited. conditions under which the stock of a durable good can do.Under these circumstances, the supply elasticity of the constrain the price of a new good were not met.Used stock may be close to zero - i.e. if the merged parties For example, the supply elasticity of used aircraft was were to raise prices, the extent to which the output found to be virtually zero: only a small fraction of the stock extracted from existing stock could be increased would be of surplus used (parked) aircraft could economically be very limited. And if in addition entry is unlikely to occur, and returned to service (only 180 estimated units world-wide, demand is growing fast, then durability cannot prevent the against new demand for 16,000 new aircraft required over exercise of market power. the following 20 years). This was unlikely to constrain the Whether the existence of a used stock has any effect on price of new aircraft given also the high average age of the the market power of new equipment suppliers is entirely an world-wide fleet and rapid anticipated demand growth (the empirical question, determined by the facts of the particular fleet of 9,000 was to be almost entirely replaced, and its case. It is important for policy to be able to identify in size almost doubled, over the same period). Bringing the practice the circumstances under which durability can or parked aircraft into service could have deferred at most cannot constrain the prices charged by new goods 30% of the first year’s expected purchases of new aircraft.

As a first step towards this, a simple checklist further, airlines work their equipment hard and have only can be applied at least to screen cases where the limited ability to use their existing stock of aircraft more constraining effect of used equipment is plausible from intensively to obviate the need for a new plane. The ability cases where it is not to defer retirement of existing aircraft was also limited, and even if retirement of existing aircraft could have been reduced by 5-10% this would have resulted in an increase Used equipment will be more likely to provide a constraint in the aircraft stock of only 20-40 units in each year.on post-merger incentives to increase price if:Unlike agricultural equipment, there were no third party (a) it is economical to use the stock more intensively suppliers of parts and services. It was plausible that
and/or the useful life of the equipment can be Boeing could have been able to render the stock of extended if the price of the new good rises, thereby McDonnell Douglas or older Boeing aircraft obsolete and reducing the demand for new equipment; thereby make it more difficult for airlines to extend the
(b) there is no substantial fraction of consumers with a useful life of the stock strong preference for new goods (especially if manufacturers can price-discriminate between those These factors suggested that the durable nature of aircraft who do and those who do not value newness); could at most increase slightly the elasticity of industry (c) goods do not depreciate rapidly, and technical change demand for new aircraft, but not make it large. Hence is not too fast, so existing products are reasonable durability was unlikely to eliminate any anti-competitive substitutes for new products; impact of the merger.(d) demand growth is slow, so it is more likely that customers can meet their demand by using the stock 

Enforcement agencies have been traditionally resistant sales of new equipment are not high relative to the durable goods arguments because of the potentially far-existing stock, so new goods suppliers would have to reaching implications for the analysis of mergers. However decrease their sales substantially to have any there are good economic reasons why durability can appreciable upward effect on prices; constrain future price increases for new equipment. manufacturers do not control the maintenance of the stock, so owners should have no problem obtaining The effectiveness of this constraint will of course depend parts and service and manufacturers cannot on the specific industry circumstances. Certainly the accelerate its obsolescence; likelihood that used tractors constrain the price of new goods are sold rather than leased, so that the tractors does not extend automatically to other durable remaining “stream of services” embodied in the goods. For example, the rate of depreciation of tractors is existing stock of equipment is controlled by customers low relative to durable goods such as cars and trucks(or second hand re-sellers), and not by the new goods (which typically have much shorter lifetimes). 

In these industries would therefore be less effective in constraining the price of new equipment. Similarly, rapid the more of these conditions are satisfied, the more technological changes in durable goods such as computer plausible it is that durable goods will constrain the ability of and telecommunications equipment make these types of new equipment manufacturers to raise price following a used goods less effective in constraining the price of new merger. Furthermore, the durable nature of goods makes equipment. Only an extensive empirical assessment can oligopolistic coordination (‘collective dominance’) establish whether the existing stock of used equipment can significantly more difficult to achieve. indeed provide a credible competitive constraint which will prevent prices from rising.

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