Dynamic Durable Goods Monopoly and Market Power

Basak Altan

doi:10.3390/g11020022

Abstract

We analyze a vertically differentiated market for an imperfectly durable good served by a monopolist in an infinite-horizon, discrete-time game. Our goal is to identify the Markov perfect stationary equilibria where the seller can maintain his monopoly power. We establish that the set of parameters supporting a monopoly outcome is larger when the seller offers different quality versions of the same product. Hence, our results suggest that, when the innate durability of a product is high, the seller should offer different quality versions of the product.

Highlights

The time-inconsistency problem of durable goods monopolist has been aggressively studied since [1] conjectured that the sequence of prices of a monopolist selling a perfectly durable good does not maximize his overall profitability
We examine quality differentiation as a strategy to alleviate the commitment problem of a durable goods monopolist and study whether the simultaneous introduction of vertically differentiated goods enables the monopolist to maintain his market power
When the product depreciates, the replacement sales become more profitable than penetrating the market by cutting the price of the good. We extend their single good setting into a setting of a vertically differentiated market to analyze the effect of quality differentiation on the commitment problem of a durable goods monopolist

Summary

Introduction

The time-inconsistency problem of durable goods monopolist has been aggressively studied since [1] conjectured that the sequence of prices (or outputs) of a monopolist selling a perfectly durable good does not maximize his overall profitability. Reference [8,9] characterize the effect of the depreciation rate on the market outcome of a durable goods monopoly when agents follow Markov strategies They conclude that, below a certain level of durability, there exists a unique stationary equilibrium in which the monopolist charges the static monopoly price in each period and the equilibrium continues to exist even when the seller becomes highly impatient. Reference [19] studies quality differentiation of a perfectly durable product in an infinite-horizon model and establishes that introducing a lower quality good mitigates the time inconsistency problem. Reference [20] studies a durable goods monopolist who can offer perfectly durable goods in different qualities in an infinite-horizon model and shows that, when the monopolist becomes extremely flexible in adjusting the prices and qualities, he immediately loses his monopoly power and the competitive outcome is achieved.

Dynamic Optimization Problem

Analysis

Conclusions