New / Old
Products that suffer from wear and tear need to be replaced over time. Economists distinguish durable goods from consumables but both are used recurrently until they get used up or discarded. Examples range from office supplies to clothing to automobiles – all wear out and need to be replaced. But examples do not include disposable products which are used once and then discarded.
As durable products wear out, users have the option of replacing them. They can pay to purchase a new product, or continue using the old product at no additional expense. Hence they must continually compare their Consumer Surplus from the new versus the depreciation of old.
This Market Simulation models the market for jeans.
When Customers enter the market they don’t have a pair of jeans to wear. But after they buy a pair they then have the ‘Old Product’ and don’t immediately need to buy another new pair. The value of the old pair of jeans depreciates over time, with some Customers wearing out their jeans faster than others. Customers continually assess whether they should purchase a new pair of jeans or continue to wear their old pair of “free” jeans.
The simulation loops over 10 iterations, during which time most Customers will purchase two or three pairs of jeans.
First Pair of Jeans
There are 1,000 Customers in this Market and 8 brands of jeans:
All jeans are priced at $40 and no pair of jeans has an average Willingness To Pay (WTP) higher than any other pair.
All Customers will initially purchase the pair of jeans for which they will gain the greatest Consumer Surplus. From then on after, this pair of jeans becomes the ‘Old Product’ which starts to depreciates over time.
Within each of the 10 iteration loops, Customers decide whether to keep their old pair of jeans or purchase a new pair of jeans. If Customers decide to purchase a new pair, then the (first) ‘Scale Purchase’ node will automatically start tracking their WTP within the ‘Old Product’ field. Otherwise, the (second) ‘Scale Purchase’ node will further depreciate the value of the Customer’s old pair of jeans.
After 10 loop iterations the decisions made by each Customer over time can be analyzed.
The depreciating value of each Customer’s jeans can be plotted and compared to the Consumer Surplus that the Customer would enjoy if they purchased a replacement pair of jeans. When the residual value of the ‘Old Product’ falls below the Consumer Surplus of purchasing the ‘New Product’ then the Customer will buy a replacement pair of jeans.
Note that in this Market Simulation all the Customers will only ever purchase their one favorite brand of jeans – they will never purchase a different brand. This is because, in this model, their WTP for jeans does not change. But in real-life, a Customer’s WTP for jeans may change for any number of reasons.
The next Market Simulation, MS-194 Diminishing Marginal Utility, explores how a Customer’s WTP for a Product may diminish once they’ve purchased that Product. This may cause the Customer to seek out variety and purchase a different Product even in the same Category.