Optimal Depreciation Policy: Pricing the Products of Durable Assets

Abstract

Depreciation policy is analyzed from the point of view of optimal inter-temporal resource allocation. Because depreciation determines the time pattern of prices of the product of an asset it affects the timing of demands. Models extended from peak-load pricing theory are used to determine rules for depreciation that are consistent with economic efficiency of asset utilization. They show how technological progress, inflation maintenance cost patterns, user costs, and other related elements should affect depreciation. The role of forecasting is considered and it is shown that in certain circumstances prediction becomes virtually unnecessary for optimal depreciation decisions.

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