Managerial Incentives and Durable Goods Monopoly

In many cases durable goods monopolists who sell out output do not appear to act in the competitive fashion suggested by Coase (1972). This indicates the firm‘s owners mitigate their commitment problem with buyers in some manner. This paper shows that managerial incentives provide a natural mechanism for the owner to mitigate its commitment problem without explicitly contracting with buyers. Owners will optimally shift their managers from the singular goal of profit maximization by penalizing them for sales. Additionally, the paper demonstrates that the degree to which managerial incentives and compensation diverge from pure profit maximization is in large part a function of the durability or quality of the product.