Durable goods monopoly with stochastic costs

Abstract

I study the problem of a durable good monopolist who lacks commitment power and whose marginal cost of production varies stochastically over time. Time-varying costs modify the results on the Coase conjecture. When the distribution of consumer valuations is discrete, the monopolist is able to exercise market power and the market outcome is ine¢ cient. In contrast, with a continuum of types the monopolist is unable to extract additional rents from buyers with higher valuations. Moreover, the market outcome is …rst best e¢ cient in this setting: the monopolist serves consumers sequentially as costs decrease, precisely at the point in time that maximizes total surplus. The model is set up in continuous time and the monopolist’s marginal cost evolves as a � :