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When the hardware breaks, the customer is confronted with the whole system decision again. The ideal case for Apple might well be that each iPod lasts forever, as long as people buy songs (which in turn really cements Apple’s market position).

What measure of “market share” is assumed? Number of units sold or number of active/intact units in circulation? Isn’t the first a bit dysfunctional if it doesn’t correlate closely with the second?

Given the type of good Apple is providing, I’d want to see a lot more empirical data before I bought into Hoffman’s analysis. One thing he doesn’t contemplate: iPods have very short product cycles in any event. For instance, I’ve joined the iPod brigade with a Nano, and I’ll probably keep it. But a year from now, who knows what Apple will have come out with? If it broke, I might upgrade, but I might also change brands.

It’s worth noting that I changed to the iPod after one of the competitor’s products (a Creative Zen) broke on me after 30 days of use. Nocera seems to be assuming that there is a higher-quality competitor out there.

It should be noted (and not in direct response to Matt) that ex ante “network” or “systems comeptition,” i.e. competition for the field, is also an important part of the competitive process and creates further benefits for consumers. Competition for the opportunity to profit in complementary markets (or with repeat purchases resulting from switching costs) increases consumer welfare as manufacturers fight to get broader distribution. Geoff alludes to this point in his comment. Frequently, the gut reaction in antitrust analysis is that ex post competition (on the retail shelves for consumers) is more likely to increase consumer welfare. This reaction, in my view, is fundamentally incorrect.

You assume that they wouldn’t want a machine that breaks down in one year, rather than four, because it would hurt their market share. And yes, over time it would. But how long would it take for consumers to realize that their iPods break down? At least a year. And by then, they’re already stacked with songs. Word may spread eventually, but it will be slowest in getting to the folks who buy their iPod later in the game — i.e., the less cutting-edge folks. So if Apple times it correctly, then the market reaction to the short-lived iPods doesn’t happen for three or so years — perhaps right about the time when there are real competitors on the technology. And then, voila! — Apple can announce a new, improved, longer-lasting iPod.

Look, it is fairly paranoid to think that Apple is rigging the iPod to wear out more quickly — the more logical inference is that they’re stuck with the technology they have. And I agree — if they can keep their monopoly longer by producing the best product, then it probably makes sense for them to do it. But it’s the old tipping point question. Once consumers have invested, monetarily and psychically, in their iPods, how much will it take to drive them away?

Here is why I find that claim implausible. And quite frankly, it is even MORE implausible without the optimism bias:

If you are a monopolist, looking to get your monopoly profits while you can, the strategy of selling products with poor design to induce repeat purchases has a very significant cost. Specifically, of losing your monopoly position without ever obtaining your monopoly rent!

The reason that you are a “short-term” monopolist is because there are not yet sufficiently close substitutes to your product to discipline your pricing. The longer you sustain your monopoly position, of course, the better off you are. Bad warranties and poor product design on the hopes that you induce future sales seem like an odd way to extract monopoly rents in a world where you may lose your position at any moment as a result of the innovative efforts of entrants and competitors. Even a one year wait in the iPod world is not trivial in terms of the potential for technological change.

“If Apple is a monopolist, it strikes me as implausible that they would collect their monopoly return through repeat purchases induced by having machines disappoint consumers by breaking down early.”

Why is it implausible? If you have a short term monopoly, and you’re looking to extract your monopoly rents while you can, why not raise the price of the machines? And is it easier to raise the price by raising the actual price or by shortening their shelf life? For example, do you think they would sell more iPods if they cost $1000 and lasted four years, or cost $250 and lasted one year?

So you don’t have to get to the optimism bias at all. But that’s far from saying they are intentionally shortening the iPod’s longevity. That’s quite another leap.

You might argue that optimism bias creates a window for Apple to abuse its customers (perhaps not large enough for “buy a new Mac or lose your music,” but maybe big enough for some abuse – like planned obsolescence or shoddy construction). Perhaps, but here I have to ask – how reliable is the evidence of a bias like this? Doesn’t it depend entirely on discount rates? You note that people are more optimistic than the models predict. How do we measure that? I have a pretty high discount rate – am I “irrational” or “overly optimistic”? Just curious about the quality of the claims that we’re less rational than we think we are.

Josh Wright has an absolutely must-read post that takes off from a discussion about how Apple is supposedly foisting defective IPods on lame consumers, but ends up being about the defective use of behavioral and antitrust economics….