Strategic Vertical Differentiation and Durable Goods Monopoly

This paper considers a novel and strategic use of quality as a means for solving the durable-goods time inconsistency problem. It demonstrates how durable-goods producers can exploit the cannibalization of high-quality markets by low-quality goods. Relative to the static product line solution, this strategic dimension of quality choice implies higher quality levels of low-end goods and the production of some low-end products that would not otherwise be produced. In some cases, low-end goods may rationally be sold below cost. The paper, therefore, offers a purely Coasian explanation for vertical product differentiation.