A dynamic structural analysis of the PC microprocessor industry

In durable goods markets, sellers face a dynamic trade-off: more units sold today come at the expense of selling more units tomorrow. Buyers face a similar dynamic trade-off: should they purchase a new product today or retain their existing product and purchase a potentially better product tomorrow? These issues lay at the heart of durable goods markets---especially those involving high-tech products---yet relatively little research addresses them from an empirical perspective. To that end, this dissertation provides a dynamic structural analysis of demand and competition within the context of the PC microprocessor industry. This industry is particularly interesting because it is a duopoly that has experienced intense technological and price competition.; First, I estimate a model of dynamic demand that allows for both product adoption and replacement decisions when consumers are uncertain about future product price and quality. In the absence of panel data, I show how to infer replacement from a combination of aggregate data. The results show that heterogeneity in replacement behavior provides an opportunity for firms to tailor their product introduction and pricing strategies by targeting specific consumer replacement segments.; Second, I extend this analysis to construct an equilibrium model of dynamic oligopoly with durable goods and endogenous innovation. Firms make dynamic pricing and investment decisions while taking into account competitors' strategies and the aggregate dynamic behavior of consumers. I examine the role of product durability on firms' optimal policy functions and the nature of competition in the industry. I find that industry profits are 24 and 41 percent lower in the duopoly and monopoly settings, respectively, when the firms ignore the durable nature of the product while setting prices. Welfare outcomes also differ significantly: compared to a socially benevolent monopolist, consumer welfare is 22 percent lower in a duopoly and 54 percent lower in a monopoly. This demonstrates the strong link between optimal firm behavior and accounting for durability and dynamic demand.