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]
