Upgrading Heterogeneous Consumers

Abstract

We study how a durable-goods monopolist upgrades heterogeneous consumers in an infinite horizon model of quality growth. While unable to charge consumers based on their purchase histories, the monopolist may engage in both inter- and intra-temporal price discriminations: charge different prices for goods of the same quality over time and offer different buyback prices for earlier, lower quality versions. First, we consider that there is a frictionless secondhand market such that consumers are anonymous. The monopolist always keeps high-value consumers abreast of the latest development. Moreover, when consumers are similar, the monopolist also upgrades low-value consumers at the same pace as the high-value ones. Otherwise, the monopolist completely ignores low-value consumers and focuses only on the high-value ones. Second, we consider where there is no secondhand market and consumers are semi-anonymous. If consumers and the monopolist are impatient, the outcome is the same as in an anonymous market. Otherwise, besides the efficient pooling equilibrium, there are three interesting inefficient upgrade patterns where high-value consumers always upgrade every period: the low-value consumers (1) keep a constant quality difference from the high-value ones, (2) upgrade in cycles but below the quality frontier, and (3) upgrade to the frontier in cycles.