Dynamics of Consumer Demand for New Durable Goods

This paper specifies and estimates a dynamic model of consumer preferences for new durable goods with persistent heterogeneous consumer tastes, rational expectations about future products and repeat purchases over time. Most new consumer durable goods, particularly consumer electronics, are characterized by relatively high initial prices followed by rapid declines in prices and improvements in quality. The evolving nature of product attributes suggests the importance of modeling dynamics in estimating consumer preferences. We estimate the model on the digital camcorder industry using a panel data set on prices, sales and characteristics. We find that dynamics are a very important determinant of consumer preferences and that estimated coefficients are more plausible than with traditional static models. We use the estimates to evaluate cost-of-living indices for new consumer goods and dynamic demand elasticities. ∗We thank Dan Ackerberg, Victor Aguirregabiria, Ana Aizcorbe, Rabah Amir, Lanier Benkard, Steve Berry, Sofronis Clerides, Simon Gilchrist, Avi Goldfarb, Igal Hendel, Kei Hirano, Firat Inceoglu, John Krainer, Ariel Pakes, Minsoo Park, Rob Porter, Jeff Prince, Pasquale Schiraldi, Andy Skrzypacz, Mo Xiao and seminar participants at several institutions for helpful comments; Haizhen Lin, Ryan Murphy, David Rapson, Alex Shcherbakov, and Shirley Wong for research assistance; and the NPD Group, ICR-CENTRIS, Ali Hortaçsu and Jeff Prince for providing data. The comments of the editor and four anonymous referees substantially improved the paper. We acknowledge funding from the National Science Foundation. All errors are our own.