I. Introduction
In many durable goods settings, the choice of when to buy is as impor-
tant to consumers as what to buy. Particularly for consumer electronics,
the quote from Consumer Reports conveys the conventional wisdom: prices
will fall and new choices, often higher-quality ones, will arrive. As a result,
many consumers purposely delay their purchase of these goods. When
they do purchase, consumers often have in mind that they will rep lace the
model with a superior model in the foreseeable future. Thus, dynamic
behavior is an important element of demand for consumer durable
goods. This paper specifies a structural dynamic model of consumer
preferences for new durable goods, estimates the model using data on
digital camcorders that are primarily at the level of the camcorder model,
and uses the model to evaluate elasticities and cost-of-living indices for
this market.
The digital camcorder industry is an important sector, with about
11 million units sold in the United States from 2000 to 2006. During
this time, the sector also experienced a huge evolution. Average digital
camcorder prices dropped from $930 to $380 while average pixel counts
rose from 580,000 to 1.08 million. The number of models available grew
from fewer than 30 to almost 100. Annual sales grew by 2.6 times in
4 years. The rapidly evolving nature of the characteristics and sales—
together with the fact that consumers are advised to consider the dy-
namic implications of their decisions—suggests that modeling dynamics
is empirically very important for estimating consumer preferences in
this industry. These issues have broad applicability: rapidly falling prices
and improving features have been among the most visible phenomena
in a large number of other new consumer durable goods markets, in-
cluding computers, digital video disc players, and high-definition televi-
sions.
In our model, dynamically optimizing consumers may choo se among
the set of available camcorders or wait. Camcorders are durable, so pur-
chase provides flow utility into the future. The available prices, quality,
and variety may improve over time, so waiting is valuable. In addition,
while consumers can hold only one camcorder at a time, they may sub-
stitute a new camcorder for an old one, so consumers continue to eval-
uate the market even after purchase. Our model allows for product
differentiation, endogeneity of prices, a changing number of models,
Hendel, Kei Hirano, Firat Inceoglu, Sam Kortum, John Krainer, Aviv Nevo, Ariel Pakes,
Minsoo Park, Rob Porter, Jeff Prince, John Rust, Pasquale Schiraldi, Andy Skrzypacz, Mo
Xiao, and seminar participants at several institutions for helpful comments; Mingli Chen,
Haizhen Lin, Ryan Murphy, Kathleen Nosal, David Rapson, Alex Shcherbakov, and Shirley
Wong for research assistance; and the NPD Group and ICR-CENTRIS for providing data.
The comments of the editor and anonymous referees substantially improved the paper. We
acknowledge funding from the National Science Foundation. All errors are our own.
1174 journal of political economy
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