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.     

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.     

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.     

Network effects,aftermarkets and the Coase conjecture: A dynamic Markovian approach

This paper investigates the expansion of the network of a monopolist firm that produces a durable good and is also involved in the corresponding aftermarket. We characterize the Markov Perfect Equilibrium of the continuous time dynamic game played by the monopolist and the forward-looking consumers, under the assumption that consumers benefit from the subsequent expansion of the network. The paper contributes to the theoretical discussion on the validity of the Coase conjecture, analyzing whether Coase's prediction that the monopolist serves the market in a “twinkling of an eye” remains valid in our setup. We conclude that the equilibrium network development may actually be gradual, contradicting Coase's conjecture. We find that a necessary condition for such a result is the existence of aftermarket network effects that accrue (at least partly) to the monopolist firm.     

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.     

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.     

OPTIMAL PRICING AND QUALITY CHOICE WHEN INVESTMENT IN QUALITY IS IRREVERSIBLE

This paper examines the price and quality choice of a single product, risk-neutral monopolist who can delay irreversible investments required for market entry. It is shown that the price and quality she chooses at entry increase with uncertainty about the size of future demand. In a Stackelberg leader-follower game, the leader and follower pre-commit immediately up to a certain level of uncertainty. In this case the leader produces the higher quality good. When uncertainty is higher than this threshold, the follower will wait and enter the market later with a higher quality good.     

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.     

Vertical Contracts and Downstream Entry*

We study the implications of different contractual forms in a market with an incumbent upstream monopolist and free downstream entry. We show that traditional conclusions regarding the desirability of linear contracts radically change when entry in the downstream market is endogenous rather than exogenous. By triggering more entry than two-part tariffs, wholesale price contracts can generate higher aggregate output, consumer surplus, and welfare. In light of this, the upstream monopolist may prefer to trade with wholesale price contracts as well as to give up part of its bargaining power when it is high.     

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.     

Third-Degree Price Discrimination With Interdependent Demands

This paper analyzes the price, output, and welfare effects of third-degree price discrimination for a monopolist who sells in two interdependent markets. The case where the two goods sold by the monopolist are complements is analyzed as well as the more typical case where the two goods are substitutes. The economic effects of price discrimination are shown to depend on the type and strength of demand interdependence, the curvature of the demands and the slope of marginal cost. The circumstances under which price discrimination causes both market prices to either rise or fall are also analyzed.     

Pricing the razor: A note on two-part tariffs

The “razor-and-blades” pricing strategy involves setting a low price for a durable basic product (razors) and a high price for a complementary consumable (blades). In a timeless model, Oi (1971) showed that if consumers' demand curves differ and do not cross and unit costs are constant, a monopolist should always price blades above cost. This note studies the optimal razor price. With a uniform distribution of parallel linear demand curves it is never optimal to sell the razor below cost, while with two types of consumers and non-crossing linear demands it is optimal to do so for some parameter values.     

Speculators and Price Overreaction in the Housing Market

This paper investigates the role of speculators in the housing market, specifically their contribution to price overreaction through positive feedback trading (or momentum trading). We exploit a unique data set of condominium transactions in a residential real estate market where transaction traits associated with short‐term speculation can be identified. In the cross‐section of housing projects, a 10‐percentage‐point increase in trading activity following a strong short‐run market price rise predicts a negative subsequent monthly price change of 0.5% at the project level. Moreover, the price reversal effect associated with the momentum trading by short‐term speculators is two to three times stronger, and holding such trading constant, momentum trading in general has little additional impact. Our findings further suggest that momentum trading by short‐term speculators contributes to price overreaction largely in submarkets with lower information efficiency.     

Bundling, Competition and Quality Investment: A Welfare Analysis

We investigate how bundling affects investment in product quality, and derive welfare implications. A monopolist in a primary market competes with a rival in a complementary market. Bundling is the monopolist’s preferred strategy, since it either extracts surplus from the rival’s investment, or forces the rival to provide low quality. Bundling may reduce welfare without foreclosing the rival, but improves welfare when preventing undesirable investment. Since prohibiting bundling is not appropriate, we introduce a price test for bundled offers that preserves efficiencies from both bundling and quality investment, thereby improving welfare relative to the ‘do-nothing’ scenario. We consequently argue that this test should be applied whenever possible.     

我国商品房市场量价关系的实证分析

目前对房地产市场的研究主要集中于房价,而对量价关系的研究较少。鉴于此,文章利用1998～2008年的全国商品房季度数据,对我国商品房市场量价关系进行实证研究,并得出以下结论：从长期来看,我国商品房市场的交易量与价格之间存在协整关系;因果检验显示交易量是价格的格兰杰原因,反之则不成立;通过脉冲响应函数发现外界冲击导致了量价的一致波动且交易量对外界冲击的响应比房价更敏感。     

Technological Incompatibility, Endogenous Switching Costs and Lock-in

Systems are goods comprising of durables that are sequentially updated with complements. With sequential purchases, if suppliers produce incompatible brands, consumers who upgrade systems with complements of a different brand must replace the durables they own. Thus, the price of these durables is an endogenous switching cost. The paper deals with the concern that firms may use incompatibility to create consumer's switching costs to reduce competition in aftermarkets. However, it shows that, with homogenous durables, and small costs of reaching compatibility, endogenous switching costs increase intertemporal price competition to the extent that producers prefer to have compatible technologies.     

Welfare Changes in the Cournot Setting with an Empirical Application to the Telecommunications Industry

I characterize the efficiency of the Cournot equilibrium and provide bounds for the loss in consumer surplus, producer surplus and welfare when the number of firms in the market changes. I only assume that demand is decreasing in price and costs increasing in the quantity produced as long as equilibrium exists. I show how price, demand and average cost, before and after the number of firms in the market changes, can be used to compute these bounds. I apply these bounds to the Portuguese wireline market and conclude that welfare increased significantly when the monopolist was split in 2007.     

Informative Advertising and Optimal Targeting in a Monopoly

This paper analyzes how the transition from mass to specialized advertising can affect the market outcomes. To that end, we consider a particular technology of information transmission which allows a monopolist to decide the optimal targeting strategy. From this starting point, we show that the use of targeted advertising is likely to increase the market price and reduce the level of advertising, and that the degree of media specialization chosen by the monopolist tends to exceed the socially optimal. Furthermore, our model indicates that the social loss resulting from the greater monopoly power might exceed the gain due to the lower wasting of ads, in such a way that targeting could reduce consumer surplus and, what is more important, the level of social welfare.     

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.     

Taxation and Durable Goods Monopoly*

This paper studies the role of taxation in durable good markets with dynamic monopolies. By conditioning the marginal tax rate on the volume of trade, the regulator can provide incentives for the monopolist to accelerate trade. When marginal cost pricing generates a loss for the monopolist, strategic delay cannot be avoided under regulatory budget constraint and the effects of tax policy depend on the monopolist's ability to commit. In the context of binary consumer types, we find a tax policy involving “back-loaded subsidy” that achieves the second-best outcome with commitment. In contrast, without commitment, a “front-loaded subsidy” improves welfare.