Self-Sabotage and Durable-Goods Monopoly

Abstract

We analyze a simple two-period linear demand durable-goods monopoly model with “self-sabotage.” The firm has the ability to sabotage its own production by increasing its future (period two) manufacturing costs. We find that an uncommitted monopoly seller has an incentive to engage in such self-sabotage, while a committed seller or renter has no such incentive. Unlike the previous papers on self-sabotage, we show this occurs even though the firm faces no rivals in the output market. In our durable-goods setting, the incentive for self-sabotage arises from the seller’s commitment problem with period-one buyers (the so-called Coase conjecture). Interestingly, we also find that this sort of self-sabotage can not only be profit enhancing for the uncommitted firm, but may also increase social welfare (in contrast to the earlier models on self-sabotage.)