Living Economics

Self-Competition
Durability of capital goods poses challenge to producers in a mature market.

The median age of passenger cars in the U.S., excluding light trucks, has moved up over the past decade to 8.9 years from about 7.5 years in 1994. This simple statistic means that cars are more durable because they are better made. Indeed, half of the cars on the road in 1977 survived until they were 10.5 years old, and you could expect to put about 107,000 miles on a car during its useful life. By 2001, 50% of the cars lasted 13 years and could be expected to run for 152,000 miles during its life span. The rising median age also means that fewer cars have been scrapped from than added to the existing stocks.

Durability of capital goods is welcomed by individual car owners who could use the money normally spent on replacing their non-operable cars for something else. But it is bad news for the auto industry that is saddled with surplus capacity. In a highly saturated market where there is already one car for every American of driving age, there is not much room for growth except from replacement. If the replacement cycle is lengthened, that is just another whammy on top of the slow market.

In any highly saturated market, longevity of existing products poses a significant challenge to the vitality of the dominant producers whose market share could go only downward in the face of more vibrant emerging competitors. Toyota could grow at a healthy clip as long as it is simply taking market share from General Motors and Ford. But once it becomes the dominant producer, it will be bogged down by the twin traps of demography and durability.

Thus, the biggest competition for Microsoft comes from the older versions of its installed software. The biggest competition of Dell comes from the older Dell computers. And the biggest competition for Intel comes from its 32-bit installed microprocessors. So it is understandable why every dominant producer in saturated markets is furiously trying to come up with newer and improved versions that will hopefully make its existing products economically obsolete.

Auto makers can of course make their cars less durable. But that is a self-defeating short-term strategy because it will cede market share to those who make more durable cars. Consumers value durability not only because of lower maintenance cost but also higher resale value.

There is a silver lining from durability for some businesses. More durable cars mean more routine maintenance. That is welcome news for auto parts makers and auto service shops.

Note:
  1. Editor's note: Publishers of college textbooks also face fierce competition from their own used books. Since they do not benefit from the used-books market, they are forced to shorten their revision cycle just to sell more newer-edition books. See Licensing Textbooks
  2. Editor's note: Publishers of college textbooks also face fierce competition from their own used books. Since they do not benefit from the used-books market, they are forced to shorten their revision cycle just to sell more newer-edition books. See Licensing Textbooks
References:
  • National Transportation Statistics 2005. Bureau of Transportation Statistics. US Department of Transportation. Section C: Condition.
  • WSJ. 2/28/2006. “Cars last longer, driving a shift in all aspects of the auto sector.”
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