The effects of sensitization and habituation in durable goods markets

We develop a model to study the impact of changes in price or quality sensitivity on the firm as it introduces multiple generations of a durable product where unit costs are a convex function of quality. We incorporate the psychological processes of sensitization and habituation into a model of discretionary purchasing of replacement products motivated by past experience. When price sensitivity decreases with each purchase, the firm should offer a higher quality product at a much higher price with each generation. When price sensitivity increases with each purchase (habituation), skimming is the optimal strategy. When there is sensitization followed by habituation, the firm eventually provides higher quality than the market is willing to pay for, leading to a steep drop-off in sales and profits. This analysis provides a model of the consumer behavior underlying the phenomenon of “performance oversupply” identified in the innovation literature. PLEASE DO NOT DISTRIBUTE WITHOUT THE AUTHORS’ PERMISSION 1 The first author would like to thank CAPES for the funding provided for this research.