Durable Goods Monopolist Research Articles

Choice of Product Variety for the Durable-goods Monopolist

This paper analyzes the strategic choice of variety by a monopolist seller of a durable good as a means to mitigate his commitment problem. The monopolist chooses his product variety with a goal of ensuring that a strong reduction in future prices will not be profitable because it allows the firm to attract few additional consumers. The main result that emerges from considering product variety as an endogenous variable is that, contrary to the case in which it is exogenously determined, social welfare is always higher when the monopolist cannot commit that when he can.

Price and quality discrimination in durable goods monopoly with resale trading

We examine a durable goods monopolist’s optimal dynamic price and product quality strategy when buyers are rational and can trade used durables among themselves. In contrast to the usual credibility problem of the durable goods monopolist, intertemporal quality discrimination introduces a time-inconsistency problem of not raising prices against high-valuation consumers who delay purchase for quality upgrades. Resale trading ameliorates this time-inconsistency problem and allows the monopolist to effectively price discriminate, especially when the buyers are patient. The monopolist’s optimal price and quality offers in the new good market exhibit complex dynamic patterns, and new good prices can fall as product quality improves even in the absence of entry threats or learning economies. Initial quality distortions are followed by steady-state quality allocations that are always efficient for the high-valuation buyers, but sometimes also for the marginal consumer-types. Both the resale trading frequency and the price discount for secondhand goods are driven by the pace of strategic quality obsolescence in the new good market.

Durable Goods, Coasian Dynamics, and Uncertainty: Theory and Experiments

This paper presents a model in which a durable goods monopolist sells a product to two buyers. Each buyer is privately informed about his own valuation. Thus all players are imperfectly informed about market demand. We study the monopolist’s pricing behavior as players’ uncertainty regarding demand vanishes in the limit. In the limit, players are perfectly informed about the downward‐sloping demand. We show that in all games belonging to a fixed and open neighborhood of the limit game there exists a generically unique equilibrium outcome that exhibits Coasian dynamics and in which play lasts for at most two periods. A laboratory experiment shows that, consistent with our theory, outcomes in the Certain and Uncertain Demand treatments are the same. Median opening prices in both treatments are roughly at the level predicted and considerably below the monopoly price. Consistent with Coasian dynamics, these prices are lower for higher discount factors. Demand withholding, however, leads to more trading period...

Pricing for a Durable-Goods Monopolist Under Rapid Sequential Innovation

A durable-goods monopolist who will be introducing new and improved versions of his product must decide how to price his products, keeping in mind the relative attractiveness of the current and future products. Dhebar (1994) has shown that if technology is changing too quickly and the producer cannot credibly commit to future prices and quality, then no equilibrium strategy exists. That is, there is no credible strategy for the future product that the producer can commit to in the first period. We show that an equilibrium pricing strategy exists if the monopolist does not offer upgrade pricing, that is, special pricing to consumers who have bought an earlier version. The author shows the possible purchase patterns in equilibrium and derives the optimal pricing strategy.

Planned obsolescence and marketing strategy

By using a two-period model of a durable goods monopolist, we investigate marketing activities that have an obsolescence effect on products already sold in the past period. We assume that the monopolist can stimulate consumer demand for second-period products by marketing activities, and analyse not only the case where the level of marketing is determined in the second period, but also the case where it is determined in advance, namely, in the first period. It is shown that the equilibrium level of marketing becomes higher than the efficiency level not only in the former case, but also in the latter case if the obsolescence effect is not so large. Copyright © 2000 John Wiley & Sons, Ltd.

Why would a durable good monopolist also produce a cost-inefficient nondurable good?

We develop both commitment and time-consistent stationary policies for a monopolist who produces a mixture of goods distinguished by production costs and degree of durability. Under commitment, only the cost-efficient durable good is produced and the monopoly output is realized each period. For the time-consistent stationary case, there is an interval for the degree of durability where only the durable good is produced and a higher, non-overlapping interval where both the cost-efficient durable and the cost-inefficient nondurable good are produced. For any period length, when the degree of durability is such that both durable and nondurable goods are provided, combined output is less than the competitive output and decreases in the degree of durability, approaching the single-period monopoly output. When both goods are produced, the Coase conjecture does not hold.

Product Innovation by a Durable-Good Monopoly

We consider a durable-good monopolist that periodically introduces new models, each new model representing an improvement upon its predecessor. We show that if the monopolist is able neither to exercise planned obsolescence (i.e., artificially shorten the lift of its products) nor to give discounts to repeat customers, the rate of product introductions is too slow -- in comparison with the social optimum. On the other hand, if the monopolist is able to artificially shorten the durability of its products or to offer price discounts to repeat customers, it can raise its profit and, at the same time, implement the social optimum.

Repair Market Structure, Product Durability, and Monopoly

This paper shows that a durable goods monopolist makes consumers choose a level of repairs which is below the socially optimal level if it monopolises the repair market as well. This distortion occurs due to the possibility of substituting new and used goods and a time inconsistency problem concerning repair decisions. However, if the monopolist is unable to commit the repair price, it may prefer to invite competitors into the repair market. If the repair market is competitive, even when the product market is monopolistic, the socially optimal level of repairs, and thus also the socially optimal durability level is chosen.

Welfare implications of Pigovian taxation of a durable goods monopolist

This paper examines the effectiveness of Pigovian taxation in checking the behaviour of a durable goods monopolist who generates some externality in the production process. The durable good lasts two periods. It is found that while the effect of an increase in the tax is to lower the first period output, the second period output decreases only under certain conditions. The overall welfare effect of a Pigovian tax can either be positive or negative depending on the relative magnitudes of the price-cost margins, the extent of the negative externality, the extent of longevity (durability) of the first period output and the underproduction relative to social optima. Public policy implications are discussed.

Quality choice and the Coase problem

This paper studies the quality choice made by a durable-good monopolist. To alleviate the Coase problem, the durable-good monopolist not only over-supplies the quality, but decreases the price per unit of quality, so that the high-demand consumers do not postpone their purchase.

L'lmpact de la négociation et des prises de contrôle sur l'ampleur de l'effet de cliquet

This paper considers a long-term relationship between a firm and a privately informed trading partner, say a buyer, when both parties bargain over a price in each period and when a takeover may take place. When takeovers are ruled out, having high bargaining power increases the firm's likelihood to exploit information previously revealed by the buyer in sub- sequent contract offers. This decreases the price which the firm can offer to induce the buyer to reveal his type. The possibility of a takeover by a raider with a bargaining power higher than the incumbent manager's increases the cost of information revelation to the buyer. This in turn leads the incumbent manager either to further decrease the price she charges to induce informa- tion revelation or to charge a semi-separating price, in which case the takeo- ver is less likely to take place. In contrast, in the durable good monopolist case, information revelation decreases expected future profits and hence the incentive for takeover so that the possibility of takeover favors information revelation. (JEL D42, D82, G32, L14)

A Theory of Economic Obsolescence

A new generation of durable goods makes an old generation economically, even if not physically, obsolete. Economic obsolescence due to technological innovation requires the durable goods monopolist to implement price discrimination in two dimensions, both between consumers with different valuations and between consumers with different purchase histories. Equilibrium in the game between the durable goods monopolist and consumers depends on the extent of economic obsolescence and the relative sizes of the consumer groups. Underinvestment in innovation may take place. This contrasts with the standard literature on planned obsolescence where the durable goods monopolist overinvests in durability reducing technology.

Intertemporal Price Discrimination in Frictionless Durable Goods Monopolies

I show that small differences in quality and production costs between durables and non‐durables in a product line allow a durable goods monopolist to intertemporally price discriminate even with continuous trading. In particular, a monopolist would want to both sell and rent out a durable to achieve price discrimination. This incentive to price discriminate simultaneously creates inefficient delay in the sale of the durable good, a finite trading period and long run efficiency of the market. The Coase conjecture fails because the non‐durable good acts as an outside option that guarantees a minimum profit in the market for durables.

Durable Services Monopolists Do Better than Durable Goods Monopolists

The authors consider a monopolist who can commit to a price path when selling a good for which individual consumers demand at most one unit. Only if the monopolist can also commit to destroying unpurchased stock and the timing of stock release, can she earn more than a static monopolist. This additional commitment power has empirical revelance for a wide range of goods that the authors term 'durable services.' The inability to store output facilitates price discrimination by a durable services monopolist by permitting the credible threat of rationing. The authors detail sufficient conditions for a durable services monopolist to produce more than a static or durable goods monopolist produces.

Optimal Taxation of a Polluting Durable Goods Monopolist

The authors consider optimal taxation in a two-period model of a durable goods monopolist where pollution is a byproduct of production. In the case where the firm rents its output, the optimal tax is lower than the tax placed on a competitive industry, all else held constant. When the monopolist sells its output, the tax will be larger than in the rental case. The authors find that this is due to the "Coase conjecture" that durable goods sales monopolists will be forced nearer to marginal cost pricing than will durable goods rental monopolists. They also show that Buchanan's result that the optimal pollution tax on a simple monopolist is less than the optimal pollution tax on a competitive industry generally holds for the case where the monopolist sells durable goods. However, an exception to this occurs when production costs decrease at the margin. In the durable goods case, Buchanan's result may be reversed. This is not the case when the goods are nondurable.

Durable-Goods Monopoly, Increasing Marginal Cost and Depreciation

This paper combines increasing marginal cost and depreciation in a continuous-time model of a durable-goods monopolist. In contrast to the case of increasing marginal cost but no depreciation (analysed by Kahn) and the case of depreciation with constant marginal cost (analysed by Bond and Samuelson), steady-state output in this model is less than in the competitive case. A turnpike result shows that choice of a long enough time horizon can make the equilibrium path of output in a finite-horizon game arbitrarily close to the path of the infinite-horizon game.

Depreciation erodes the Coase Conjecture

If a durable good monopolist produces at constant marginal costs and the good depreciates, there exists a family of Strong Markov Perfect Equilibrium (SMPE). One member of this family entails instantaneous production of the level of stock produced in a competitive equilibrium; this is consistent with the Coase Conjecture. Other SMPE in the family entail steady-state production at a stock level lower than in the competitive equilibrium. There may be a jump to these steady states, or they may be approached asymptotically. Monopoly profits are positive in these equilibria, and the Coase Conjecture fails.

Durable Goods Pricing When Quality Matters

This article considers a durable goods monopolist's choice of price and durability in a setting where durability choice controls the speed with which quality deteriorates. This article derives three main results: the price at which old units trade on the secondhand market limits what the firm can charge for new units; because of this linkage between the prices for new and old units, the firm chooses a durability level that is below the socially optimal level; and the incentive to reduce durability can be sufficiently severe that the monopolist eliminates the market for secondhand goods. Copyright 1996 by University of Chicago Press.

Product Line Decisions and the Coase Conjecture

We show that the Coase conjecture does not hold when a durable-goods monopolist also sells nondurable goods that are demand related to the durable. The presence of nondurable complements or substitutes reduces the rate at which the monopolist introduces the durable into the market. The price of the durable does not converge to marginal cost. We analyze the incentives of a monopolist to extend his product line to a durable or a nondurable. Most significantly, the profit from adding a durable to the product line disappears as the time between offers becomes short. We study the effects of entry into markets for nondurables and their implications for merger policy.

Taxation and market power when products are durable

Empirical studies suggest that industries hardest hit by government regulations, such as pollution regulations, are both highly concentrated and manufacture durable products. We analyze a two-period durable goods monopoly model where the firm faces government restrictions in the form of pollution or excise taxes. In contrast to non-durable monopolistic industries, we show that taxes on pollution or an excise tax on output may increase a durable goods monopolist's commitment ability and market power. Indeed, any policy which restricts future output may have the perverse effect of increasing a monopolist's bargaining power with buyers and enhance their profits.