Re: OT Hot paper

[Harry Binswanger hb@xxxxxxxx]

Patricia wrote:

> Nothing new about that: It's called planned obsolescence.

Years ago, an economist friend explained to me how "planned obsolescence"
is a myth. The myth is based on the confusion of sales with profits.
Companies seek to maximize profits, not sales.
Here's the example he gave me (as best I recall it).
Suppose GE could make a light bulb that lasts 20 times longer. The myth
holds that they could, and that it wouldn't cost them any (or hardly any)
more to do so, but they withhold the superbulb in order to get people to
buy replacement bulbs more often.
 
So the average customer is spending, let's say, $1 on a bulb every year,
when, but, for the greed of GE, he could be buying bulbs that would last
TWENTY years. Wouldn't GE relish getting from this customer $1 a year,
instead of $1 every 20 years (i.e., 5 cents a year)?
 
What this scenario overlooks, is that GE could charge more for the
longer-lasting bulb. Say they charged $10 for a bulb that lasts 20 years,
cutting Joe Consumer's annual light bulb outlay in half (down to 50 cents
per year on average). What happens to GE's profits? They go through the
roof. Suppose both the regular and the super bulb cost 90 cents to make.
When they sell the regular bulb they make 10 cents ($1.00 - $.90), when
they sell the superbulb they make $10.00 - $.90 = $9.10. They'd have to
sell 91 regular bulbs to make the same profit they make from selling 1
superbulb. More realistically, say the superbulb costs them $2.00 to make
(vs. $.90 for the regular bulb). In that case, GE's profit per sale is
still an amazing $8.00--instead of 10 cents! What would you rather have--10
cents a year or 800 cents every twenty years? It's an average of 10 cents
vs. 40 cents per year.
 
So everyone wins--the consumer's average annual outlays drop from $1 to 50
cents, and GE's profits of GE, per sale, go up from 10 cents per customer
per year to 40 cents per customer per year, even when the superbulb costs
more than double to manufacture.
 
This is not a trick with numbers--as you can verify by changing the costs,
the prices, etc. The principle is: when the value of a product could be
increased without a corresponding increase in costs of production, raising
the price will benefit both customer and producer. Yes, sales receipts go
down, but who cares as long as profits go up? The myth of planned
obsolescence confuses sales revenues with profits and/or forgets that a
more valuable product can be sold for more.

Harry Binswanger
hb@xxxxxxxx