Gustavo wrote "Let's assume for a minute that: (A1) It costs the manufacturer the same $8 000 to produce 1 long-lived car as it costs them to produce 1 short-lived car. (A2)...Since the manufacturers' profit per unit is more or less proportional to the cost of production (call this assumption A3), (P1) when production becomes very cheap, the manufacturers' profits can get smaller, even if the number of sales is increased....Does this make sense?" ---
No, it doesn't. Consider first the easier case of competition. In a competitive situation, as the auto market surely is, an auto maker with access to such technology would certainly use it to get a jump on the competition and grab market share. The fact that the long run implications of this would be to reduce total auto maker revenues is irrelevant in a competitive situation (and a common occurence). Now consider the monopoly situation. At first this seems like a better candidate but it isn't for the reasons given by Landsburg in John Hull's post. Think about it this way. Suppose that all sales are up-front so you can either buy 1 long lived car today which will last 20 years or you can buy 2 short lived cars today each of which will last 10 years (the second car will be in storage for the first 10 years). Even assume that consumers are indifferent between these two purchases - say they are willing to pay $20,000 either way. It's still the case that profits are much higher selling the long lived car = 20,000-8,000=12,000 rather than the two short lived cars =20,000-16,000=4,000. Alex -- Dr. Alexander Tabarrok Vice President and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621-1428 Tel. 510-632-1366, FAX: 510-568-6040 Email: [EMAIL PROTECTED]