Industry structure and the choice of product reliability

Epple and Raviv (1979) and Saving (1982) argued that product reliability may be independent of market structure. Using a two period oligopoly model we show that this conclusion is correct only if the firms are risk-neutral and output is rented. If either of these conditions is violated, the firm's reliability will not be socially optimal. Our results provide further rationale for Avinger's (1981) empirical findings on product obsolescence in the vacuum tube and electric lamp industries. We do find, however, that the independence result can be reestablished in sales markets if firms are required to provide warranties.