Unpriced quality

A monopolist charges the same price for differentiated products when high quality products are likely to be assigned to low valuation consumers. The argument explains the use of ‘unpriced quality’ for concert tickets, movie theaters, and elsewhere.     

DURABLE GOODS MONOPOLISTS AND BACKWARD COMPATIBILITY*

This paper provides an economic analysis on the choice of backward compatibility by a durable goods monopolist in the presence of network effects. We examine the time inconsistency problem faced by a monopolist in its dynamic provision of two compatible products. We suggest an economic reason why, and when it will be strategically optimal, for the monopolist to choose backward compatibility even though it is socially undesirable, and not to choose forward compatibility even though it is technologically possible. We also investigate the compatibility choices with and without price discrimination, and compare market outcomes with the social optimum. Two different social inefficiencies (planned obsolescence) which arise from the viewpoints of optimal consumption and optimal compatibility are discussed.     

The monopolist is not the best environmentalist’s best friend: An example

This letter addresses the second-degree price discrimination issue when a monopolized product is tied with environmental quality. The monopolist may degrade environmental quality too much when marginal valuations of environmental quality and the good itself are positively related across consumers.     

High Price Strategy and Quality Signalling

I investigate a high price strategy by a durable‐goods producer for signalling the high quality of goods. It is assumed that two types of monopolists exist: high‐quality and low‐quality. The monopolist's type is assumed to be unknown to consumers in the first period. Before the beginning of the second period, a product reputation established in the past period enables consumers to recognize the real type of the monopolist. I show that there occurs a signalling equilibrium where the high‐quality type monopolist uses a high price strategy. An interaction between the new and old products peculiar to the durable‐goods markets plays an important role in the pricing strategy.     

Price or quantity setting under uncertain demand and capacity constraints: An examination of the profits

This article considers price formation and quantity setting of a capacity-constrained risk-neutral firm facing uncertain demand. It is shown that the optimal price of a price-setting risk-neutral monopolist decreases with demand uncertainty. With a strictly convex demand function expected profits increase with uncertainty for a quantity-setting monopolist whereas expected profits decrease for a price-setting monopolist. Furthermore, similar results on the effect of uncertainty are derived for a differentiated goods industry.     

Advance-purchase discounts as a price discrimination device

In an intertemporal setting in which individual uncertainty is resolved over time, advance-purchase discounts can serve to price discriminate between consumers with different expected valuations for the product. Consumers with a high expected valuation purchase the product before learning their actual valuation at the offered advance-purchase discount; consumers with a low expected valuation will wait and purchase the good at the regular price only in the event where their realized valuation is high. We characterize the profit-maximizing pricing strategy of the monopolist. Furthermore, adopting a mechanism design perspective, we provide a necessary and sufficient condition under which advance-purchase discounts implement the monopolist's optimal mechanism.     

Piracy and limited liability

This paper analyzes the effects of end-user piracy on a monopolized software industry with network effects in which consumers have heterogeneous income and limited liability. Limited liability produces a piracy cost which increases with income. The monopolist thus may be able to exploit the network effect brought about by the piracy of low-income consumers to charge a higher price to high-income consumers thereby earn a higher profit, especially when the monopolist can prevent the network effect from spilling over to the high-income consumers. If intellectual property rights policies are severe enough, then the monopolist can avoid the spillover. Otherwise it may become a case where each high-income buyer benefits from the piracy but the monopolist is hurt. However, a severe policy may bring about a high piracy rate since it invites the monopolist to raise the price.      

Front-running dynamics

We integrate a monopolist dual trader into a dynamic model of speculation. In static settings, [J.-C. Rochet, J.-L. Vila, Insider trading without normality, Rev. Econ. Stud. 61 (1994), 131-152] establish an irrelevance result—expected equilibrium outcomes are the same whether the monopolist speculator sees liquidity trade or not; and Roell [Dual-capacity trading and market quality, J. Finan. Intermediation (1990), 105-124] shows that with multiple speculators, dual trading benefits liquidity traders. In dynamic settings, these results are reversed: a front-running speculator exploits knowledge of future liquidity trade, extracting greater profits by smoothing profit extraction intertemporally. Front running introduces positive serial correlation to order flow. Accordingly, market makers discount past order flow in prices, but prices retain the martingale property.     

Monopoly pricing with negative network effects: The case of vaccines

We study the market for vaccinations considering income heterogeneity on the demand side and monopoly power on the supply side. A monopolist has an incentive to exploit the external effect of vaccinations and leave the poor susceptible in order to increase the willingness to pay the rich. Even the possibility of price discrimination does not remove this incentive. We demonstrate that the weaknesses of standard policy measures are mitigated when income heterogeneity is taken into account. This offers an efficiency based rationale for distribution oriented national or international public health interventions.     

Monopolists and viscous demand

We characterize the optimal dynamic price policy of a monopolist who faces “viscous” demand for its services. Demand is viscous if it adjusts relatively slowly to price changes. We show that with the optimal policy the monopolist stops short of achieving 100% market penetration, even when all of the consumers have the same long-run willingness to pay for the service. Furthermore, for certain parameter values in the model, the price policy requires rapid oscillations of the price path.     

Entry deterrence and innovation in durable-goods monopoly

This paper investigates the efficiency of innovation investments in a durable-goods monopoly when a potential entrant threatens to innovate as well. We show that the durability of the good endows the monopolist with the power to discourage rival innovation since current sales alter the demand for a new generation of the good. The equilibrium is therefore determined not only by the incentive for intertemporal price discrimination in durable-goods monopoly, but also by the incumbent's concern for maintaining the technological leadership. We demonstrate that entry deterrence followed by no innovation always implies underinvestment in innovation.     

Optimal regulation of lumpy investments

We study optimal timing of regulated investment in a real options setting, in which the regulated monopolist has private information on investment costs. In solving the ensuing agency problem, the regulator trades off investment timing inefficiency against the dead-weight loss arising from high price caps. We show that optimal regulation is implemented by a price cap that decreases as a function of the monopolist’s chosen investment time.     

Capacity expansion and dynamic monopoly pricing

We substitute to the plant size problem, as investigated by Chenery [Chenery, H., 1952. Overcapacity and the acceleration principle. Econometrica], a new version in which a profit-maximizing monopolist may combine its investment policy with a price policy adjusting demand upwards or downwards over time. We characterize the optimal price and investment policies. The optimal price policy determines an investment pattern either with constant increments of capacity over time, or becoming constant after a finite time. The existing capacity is either fully used at each instant between two investment dates; or the monopolist first quotes the instantaneous monopoly price and, thereafter, the price dampening instantaneous demand at the optimal installed capacity level.     

Dynamic control of a monopolist’s product and process innovation with reference quality

ABSTRACT

Our main purpose is to investigate the dynamic control problem of a monopolist’s product and process innovation under reference quality. The main features of this article are: (i) a monopolist dealing with customer behaviour in the spirit of the principle of behaviour economics determines the product price, and carries out the activities of product and process innovation; (ii) the consumers’ demand depends on price, product quality and reference quality, and adopts an additive separable demand function form. Our main results show that under the cases of the monopolist optimum and the social planner optimum, (i) there exists an unique stable, which is a saddle-point steady-state equilibrium; (ii) the change rates of the monopolist’s investments in product and process innovation are increasing with the reference quality, while the monopolist’s steady-state investments in product and process innovation are decreasing with the reference quality; (iii) as the memory parameter increases with other parameters kept constant, it is very likely that the monopolist’s investment in process innovation be greater than the investment in product innovation; and (iv) the social incentive towards both investments in product and process innovation is always larger than the private incentive characterizing the profit-seeking monopolist.     

THE DETERMINANTS OF THE QUANTITY‐QUALITY BALANCE IN MONOPOLY*

This paper describes how a monopolist manipulates the balance of quantity and quality in order to increase revenue when its customers treat quantity and quality as substitutes. This ‘skewing’ of quality depends on the characteristics of customer's demand for quality. Customers differ in demand for quality, because they differ in either (i) their preferences and/or (ii) their time cost per unit. The monopolist is constrained to supply the same quality of good to all customers. The price and quality per unit are described under the assumption the monopolist (i) profit maximises; (ii) maximises social welfare subject to a profit constraint. The determinants of the skewing of quantity and quality are found under third‐degree price discrimination and uniform pricing.     

Natural monopoly and differential pricing

Under uniform pricing a monopolist cannot make a positive profit in equilibrium. I analyze how differential pricing can be exploited by a natural monopolist to deter entry when entry is costless. In a two-stage game with price competition before quantity competition I show that the incumbent firm can deter entry and make a positive profit in equilibrium. The incumbent sets two different prices, the low price to deter entry and the high price to generate profit. Entry is not possible because of scale effects. If dumping is allowed for all firms no positive profits are realizable, but welfare is reduced. I show that for some parameter values the incumbent is forced to engage in a stunt (i.e., set a negative low price) to keep entrants out.     

A note on welfare-improving ignorance about quality

Consider a monopolist that is selling a high quality product when the quality is unknown to a fraction of the consumers. If the quality cannot be signaled and the fraction is sufficiently large, then the monopolist will offer a low price to induce uninformed consumers to buy. If the fraction is sufficiently small, then uninformed consumers are irrelevant to its optimal price. If the uninformed consumers are priced out of the market as a result, then welfare can decrease. I am very grateful for the comments of two anonymous referees that have significantly improved this paper.     

Unionized labor market and licensing by a monopolist

We show that a monopolistic final goods producer may find it profitable to create competition by licensing its technology if the input market is imperfectly competitive. With a centralized union, we show that licensing by a monopolist is profitable under both uniform and discriminatory wage settings by the union. However, the incentive for licensing is higher under the former situation. We also show that licensing by the monopolist is profitable under both quantity and price competition, and the incentive for licensing is higher under price competition than under quantity competition. Our qualitative results hold even with decentralized unions.      

Raising rivals' costs: The entry of an upstream monopolist into downstream markets

A regulated upstream monopolist provides an input to firms in a downstream market. If the monopolist enters the downstream market, a natural concern is that it will act so as to raise its downstream rivals' costs. An offsetting incentive is that a higher downstream price will reduce demand for the input, which reduces the monopolist's profit. Conditions under which one incentive dominates the other are derived. The monopolist may desire to lower its downstream rivals' costs rather than raise them. These findings suggest that regulatory policy towards such downstream entry should not focus exclusively on the ability to discriminate.     

Using Market Structure to Regulate a Vertically Integrated Monopolist

A natural monopolist whose cost is private information produces a good which is combined with another good that can be produced by the monopolist or by other firms. The agency that regulates the monopolist can impose any of several different market structures in the industry: integrated monopoly, vertical separation with free entry downstream, or liberalization downstream (both integrated and independent production). When several firms produce downstream, a Cournot quantity-setting game with free entry determines the market price. We derive the optimal contracts to offer the monopolist under all three market structures and examine the influence of downstream cost differences on access prices.We then study the optimal regulatory policy where the regulator can condition the downstream market structure on the monopolist's cost report to the regulator. The optimal regulatory policy awards a monopoly to a low-cost upstream firm, but requires free entry downstream if the monopolist reports high upstream costs. Thus, the choice of market structure is an additional tool to limit rent extraction by the monopolist. Simulation analysis reveals the possibility of significant welfare gains from this additional regulatory tool.