Imperfect durability and the Coase conjecture

Abstract

This paper considers a market served by a monopolist who sells a durable goods that depreciates stochastically over time. We show that there exist three types of stationary equilibria: a Coase Conjecture equilibrium, a monopoly equilibrium and a reputational equilibrium. When the depreciation rate is low, the Coase Conjecture equilibrium is the unique equilibrium. For intermediate values of the depreciation rate, all three equilibrium types coexist. When the depreciation rate is high, the monopoly equilibrium is the unique equilibrium. Consequently, when selling a good of sufficiently low durability, the monopolist does not lose any of her monopoly power. Furthermore, the steady state output in the reputational equilibrium falls below the monopoly quantity. Hence in durable goods markets welfare losses due to monopoly power may be larger than in markets for perishables.

Dynamic Durable Goods Monopoly and Market Power

“…In each period, the game runs as follows. First, the monopolist sets the 1 The specific case where u H = u L and u H = u L hold is studied by [9].…”

“…However, reference [8] also shows the existence of an equilibrium that verifies the Coase conjecture. Then, 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.…”

Brand or Variety Choices and Periodic Sales as Substitute Instruments for Monopoly Price Discrimination

“…Examples include fixed capacity (Bulow 1982), increasing marginal cost (Kahn 1986), reputation formation (Ausubel and Deneckere 1989), and contractual provisions such as most-favored-customer and best-price clauses (Butz 1990). More recently Deneckere and Liang (2008) showed that finite durability of the good (planned obsolescence) prevents emergence of Coase's equilibrium.…”

Credible Signals of the Release of New Versions

“…5. For instance, see Bulow (1986), Bagnoli et al (1989) or Deneckere and Liang (2008);Waldman (2003) surveys.…”