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.     

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.     

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.     

Bundling of substitutes or complements

The Adams-Yellen two good bundling framework is generalized to allow the goods to be substitutes or complements. General theorems on price change effects are given. A monopolist may find it most profitable to offer the goods only as a bundle, even if they are (imperfect) substitutes, or to not bundle the goods, even if they are complements. If one good is competitively sold, a monopoly producer of the other good can never increase profits by offering his good only as part of a bundle. However, such a monopolist might profitably offer his good in both bundled and unbundled form to price discriminate, even if the two goods are substitutes.     

Spatial Price Discrimination in Input Markets with an Endogenous Market Boundary

This paper examines the welfare effect of third-degree price discrimination in a vertically related market with one upstream monopolist that sells its input to a continuum of downstream markets. Assume that the market boundary of the monopolist is endogenously determined. It is found that social welfare is necessarily lower under discriminatory than uniform pricing, even if the market area of the former is greater than that of the latter. This finding is contrary to that in the extant literature on price discrimination in final goods markets.     

An antitrust analysis of bundled loyalty discounts

Consider a monopolist in one market that faces competition in a second market. Bundled loyalty discounts, in which customers receive a price break on the monopoly good in exchange for making all purchases from the monopolist, have ambiguous welfare effects. Such discounts should not always be treated as a form of predatory pricing. In some settings, they act as tie-in sales. Existing tests for whether such discounts violate competition laws do not track changes in consumer surplus or total surplus. We apply a new test to an illustrative example based on SmithKline that assumes the “tied” market has homogeneous goods. If the tied market is characterized by Hotelling competition, bundling by the monopolist causes the rival firm to reduce its price. In numerical examples, we find that this can deter entry or induce exit.     

Innovation, Rent Extraction, and Integration in Systems Markets

We consider innovation incentives in markets where final goods are systems comprising two strictly complementary components, one of which is monopolized. We focus on the case in which the complementary component is competitively supplied and innovation is important. We explore ways in which the monopoly may have incentives to extract efficiency rents in the competitive sector, thus weakening or destroying incentives for independent innovation. We discuss how these problems are affected if the monopolist integrates into supply of the complement.     

Multilateral Vertical Contracting with an Alternative Supply: The Welfare Effects of a Ban on Price Discrimination

Rey and Tirole [Handbook of Industrial Organization. Amsterdam: Elsevier (2005)] considered a model in which a monopolist sells to downstream firms using nonlinear contracts. They showed that banning price discrimination fully restores the supplier’s ability to leverage its monopoly power by enabling it to commit not to offer side discounts. I show that the situation changes when the supplier competes against a fringe of less efficient rivals rather than being a monopolist. Then banning price discrimination may cause per-unit prices to fall and welfare to increase. The dominant supplier can take advantage of a strategic bargaining effect: reducing the per-unit price makes the outside option of buying from the fringe less profitable, allowing the dominant supplier to extract more bargaining surplus through the fixed fee.     

Optimal bundle pricing under correlated valuations

We study optimal pricing issues for a monopolist selling two indivisible goods to a continuum of consumers with correlated private valuations over the goods, where the (positive or negative) correlation is modeled using copulas in the Fréchet family. We derive explicit optimal pricing schemes and comparative statics results for various environments in our setting. The optimal pricing schemes can take several forms, including pure bundling, partial mixed bundling, and mixed bundling, depending jointly on the degrees of asymmetry and correlation of the consumers’ valuations. The explicit optimal pricing schemes also enable us to investigate whether and how the monopolist’s profit can be further improved via random assignments.     

Optimal best-price policy

A best-price policy (BP) is a promise by a seller to give her customer a refund if she reduces her price after the customer has already purchased the product. We characterize the optimal BP policy as when the seller can control both the policy length (when the promise expires) and the refund scale (what portion of the price difference is refunded). We explain why the policy length is finite and varies across industries. In a setting where consumers' valuations decline over time, we show that a finite-length BP allows the seller to commit to not lowering her price too soon, while at the same time letting her capture some of the benefits of intertemporal price discrimination. However, because the decline in consumers' valuations is uncertain, a BP does not allow the monopolist to achieve the profit she could earn with a full commitment.     

Differential Pricing in Intermediate Good Markets

This paper studies differential pricing by an upstream monopolist whose cost to supply the intermediate good differs across buyers in the downstream. It is shown that, different from demand‐based price discrimination, cost‐based differential pricing shifts production efficiently. If total output (and consumer welfare) is weakly increased under differential pricing as opposed to uniform pricing, as is true for weakly convex final market demand functions, social welfare is strictly improved. The analysis is extended to the case in which both the upstream monopolist's cost to serve the downstream firms and the downstream firms’ cost to produce the final good differ.     

TYING,COMPATIBILITY AND PLANNED OBSOLESCENCE*

According to the hypothesis of planned obsolescence, a durable goods monopolist without commitment power has an excessive incentive to introduce new products that make old units obsolete, and this reduces its overall profitability. In this paper, I reconsider the above hypothesis by examining the role of competition in a monopolist's upgrade decision. I find that, when a system add‐on is competitively supplied, a monopolist chooses to tie the add‐on to a new system that is only backward compatible, even if a commitment of not introducing the new system is available and socially optimal. Tying facilitates a price squeeze.     

Pricing of related products by a multiproduct monopolist

This paper examines the pricing behavior of a multiproduct monopolist (MPM). For a firm selling two products, the profit maximizing price of a particular item is found to depend upon its marginal cost, the own and cross-price elasticities and the budget shares of both products. Conditions are identified under which the price charged by a MPM will be greater than, less than, and equal to the price charged by an otherwise identical single product monopolist as well as the circumstances under which it is profitable for a MPM to utilize one product as a loss leader.     

Vertical integration in a monopolistically competitive industry

This paper considers forward vertical integration by a monopolist producer of an intermediate good when the downstream industry is monopolistically competitive. Alternative methods of vertical control are considered in addition to the usual input mark-up; these include franchise fees, royalties, and resale price maintenance. It is found that these methods in combination achieve perfect or near-perfect replication of the outcome under full vertical integration. The case where downstream products are differentiated by location in a circular space is studied in detail, and alternative outcomes are ranked according to their social desirability.     

Licensing information goods

A significant amount of research on patent licensing and the diffusion of knowledge is organized around static frameworks of analysis. Patent holders, however, may face a dynamic problem, namely the intertemporal consistency problem of the durable-goods monopolist that is induced by durability on the demand side. Licensing practices such as exclusive licensing contracts and most favored customer clauses allow patentees to solve or mitigate this dynamic consistency problem. There are situations, however, where these practices are not possible either due to the nature of the patent (the case of information goods) or due to compulsory patenting laws. We study the effects of the intertemporal consistency problem on patent licensing in these situations. Relative to the existing literature, we obtain the following main results: (i) all of the firms that remain in the industry will be using the innovation; (ii) royalty licensing may be superior to fixed-fee or auction licensing from the licensor's point of view; (iii) social welfare and consumer surplus may be lower than when the patent holder can commit not to make additional sales; (iv) even for non-drastic innovations, the price of the good that is produced may be lower than the competitive price corresponding to the initial situation (before the innovation was discovered).     

Economies of scale,strategic advertising and fully credible entry deterrence

Recent work on entry deterrence has emphasized the distinction between a monopolist’s reversible and irreversible preentry strategic moves (e.g., limit pricing) will not credible deter a rational potential entrant. Dixit (1980) and other have demonstrated, however, that irreversible preentry capacity investments can result in credible deterrence. In this paper, we examine preentry advertising investments which irreversibly alter postentry demand conditions. Using an infinite horizon model, we show that preentry investments in advertising may result in credible deterrence even for the extreme case where an entrant expects a collusive postentry price, and the monopolist ceases all advertising at the moment of entry.     

Multiproduct Firms' Pricing Behaviour in the Italian Grocery Trade

This paper investigates the determinants of price dispersion between different goods in grocery retailing, as the result of pricing decisions of multiproduct retailers. Demand parameters are generated using the LES system. These are then used to test theoretical predictions about the nature of supermarkets' pricing and consumers' shopping behaviour using disaggregated data from the Italian grocery trade. The empirical results concerning the supply function provide evidence for the existence, in all types of retail organisation, of a monopolistic form of price discrimination. The results are consistent with discrimination due to the exploitation of customers' switching costs.     

PRICE DISCRIMINATION IN STACKELBERG COMPETITION*

We examine the effects of price discrimination in the Stackelberg competition model for the linear demand case. We show that the leader does not use any price discrimination at all. Rather, the follower does all price discrimination. The leader directs all of its first mover preemptive advantage to attract the highest value consumers who pay a uniformly high price. We observe that profits and total welfare are larger and consumer surplus is smaller than those of the standard Stackelberg competition model.     

Commitment and monopoly pricing in durable goods models

This article investigates the issue of commitment by a durable goods monopolist. Two models of the interaction between durability, recycling, and market power are compared. The two differ according to the ability of the seller to credibly commit to a given sales strategy. This article takes the standard durable goods monopoly model, extends it to allow for depreciation, and compares the monopoly markup with Swan's predicted markup for a recycled good. The difference between the two models is shown to reduce to a single parameter in the markup equation.     

网络信息产品市场的定价模式

信息产品的特性要求产品定价依据从边际成本转向消费者支付意愿，但消费者对信息产品的支付意愿往往差别很大，这要求供应商通过产品差别化与差别定价获得尽量多的消费者剩余，保证收回成本与实现利润最大化。信息产品特性和网络市场的技术特点决定了差别定价将是网络信息产品市场的主要定价模式。本文主要介绍了版本划分和捆绑销售等差别定价模式在网络信息产品市场的应用。