Stock analysis of demand : Some implications

Date

1970

Authors

Breeden, Dennis L.

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Abstract

It is the purpose of this dissertation to investigate the implications of a model of consumer behavior in which it is assumed that the consumption pattern of the consumer includes a demand for durables, as well as a demand for nondurables . The technique employed is one of comparative statics, and the study is essentially micro-oriented. A summary of the findings of this study logically begins with those of the model of consumer behavior. Given the assumptions of the model, and allowing the consumer to carry forward stocks of unconsumed durables from one time period to another, it was found that, ceteris paribus, the consumer will eventually become saturated with durable goods. This is to say that at some point in time, depending upon the durability of the good in question, the consumer's demand for the durable would collapse (i.e., shift to the left) and become only a demand for replacement. Given the findings of the consumer model, it was hypothesized that producers of durable goods either implicitly or explicitly recognized the unique characteristics of their product and behaved in such a manner as to set them apart from producers of nondurable goods. For example, it was hypothesized that producers of durable goods (1) devoted more resources to research and development, (2) expected and realized a higher percentage of future sales to be in new products, and (3) had shorter investment payoff periods on new capital equipment than did firms producing nondurable goods. The procedure for testing the above hypotheses was divided into two parts. First, a qualitative test that consisted of a review of the literature relevant to each hypothesis was made in an attempt to find previous studies of the same nature. Second, a quantitative test of data collected by the McGraw-Hill Department of Economics over a period of twelve years was made in an attempt to see if significant differences existed between producers of durable goods and producers of nondurable goods with respect to each hypothesis. The quantitative tests consisted primarily of a standard statistical Z test (one-tailed) using a confidence interval of 5 per cent. The results of the qualitative tests proved to be inconclusive. While there was an enormous amount of literature related to each hypothesis, no previous research was found that investigated the same or similar hypotheses as those being tested in this study. The results of the quantitative tests, however, proved to be rather dramatic. In all cases, a significant difference was found between the samples of data taken from the McGraw-Hill Survey. In fact, in three of the four tests for significant difference, the critical value for the computed Z was greater than 3.00. This of course, implied that the chance of accepting the hypothesis that there was a significant difference between durable good producers and nondurable good producers when in fact it should have been rejected was one tenth of one per cent or less. The implications of the findings of this study are both subtle and pervasive. Furthermore, they may be interpreted in ways which are diametric. For example, the major finding of this study is that manufacturers of durable goods devote proportionally more of their resources to research and development, and its offspring innovation, than do manufacturers of nondurable goods. On the surface, this finding might imply that durable good manufacturers are engaged in the worthwhile and socially desirable function of providing new and better products for the consuming public. If this is the case, then little else other than a commendation is in order. However, in light of this study, it is not unreasonable to interpret the findings in an alternate way. For example, manufacturers of durable goods, because of the unique characteristics of their product, have no other choice but to spend heavily on research and development in order to continually entice the consumer with "new products." This they do in an attempt to prevent the exhaustion of the demand for their product and its possible consequence of excess capacity. If this is the case, then one might suspect that not all of the resources being devoted to research and development are for true innovations. For instance, one might surmise that a portion of these resources is simply going toward gadgetry or even toward a lessening of product durability in an attempt to keep the consumer continually returning to the market. In summary, the implications of this study contain new insight into the economic process. For example, they throw light on some of the factors that may be operating to shorten the economic life of products and consequently of the capital equipment used to produce those products. As Hattwick and Sailors indicate, the model presented in this study raises the question of a possible divergence between an economy oriented toward the goal of increasing the stock of wealth and one seeking to increase the flow of income. That is, the stock model of demand suggests that some markets may have a built-in bias against increasing the durability of their products. For example, the nature of competition (or rivalry) in these markets may be such as to channel research and development expenditures into efforts other than true innovations. If this is the case, the proportion of the national income devoted to durable goods is greater than it might otherwise be. Resources that might have been used to increase the durability of goods and hence the wealth of the consumer are used instead to increase the flow of income.

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Keywords

Supply demand, Consumer behavior

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