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Hyperbolic discounting and secondary markets

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  • Nocke, Volker
  • Peitz, Martin

Abstract

We study the effect of hyperbolic discounting on competitive equilibria in secondary markets for a durable good. Under exponential discounting, secondary markets are irrelevant in our model. They do not affect the price in the initial period and are neutral to the allocation. Under hyperbolic discounting, secondary markets are not neutral: they do affect price and allocation. The price in the unique competitive Markov equilibrium is lower than the price in the absence of secondary markets. This affects the equilibrium supply of the durable good in the initial period. We characterise all stationary competitive equilibria in terms of prices. In particular, we obtain that there are stationary competitive equilibria in which trade occurs in each period and the allocation of the durable good is inefficient. Furthermore, we show that there exist competitive equilibria with increasing, decreasing, and cycling price paths, despite the stationarity of the market environment.

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 44 (2003)
Issue (Month): 1 (July)
Pages: 77-97

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Handle: RePEc:eee:gamebe:v:44:y:2003:i:1:p:77-97

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Web page: http://www.elsevier.com/locate/inca/622836

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  1. Volker Nocke & Martin Pietz, 2001. "Hyperbolic Discounting and Secondary Markets," Economics Papers 2001-W17, Economics Group, Nuffield College, University of Oxford.
  2. Brocas, Isabelle & Carrillo, Juan D, 1999. "On Rush and Procrastination," CEPR Discussion Papers 2237, C.E.P.R. Discussion Papers.
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  4. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
  5. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
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  7. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-54, May.
  8. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  9. Carrillo, Juan D & Mariotti, Thomas, 2000. "Strategic Ignorance as a Self-Disciplining Device," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 529-44, July.
  10. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
  11. Akerlof, George A, 1991. "Procrastination and Obedience," American Economic Review, American Economic Association, vol. 81(2), pages 1-19, May.
  12. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  13. Ted O'Donoghue & Matthew Rabin, 1997. "Incentives for Procrastinators," Discussion Papers 1181, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Luttmer, Erzo G J & Mariotti, Thomas, 2000. "Subjective Discount Factors," CEPR Discussion Papers 2503, C.E.P.R. Discussion Papers.
  15. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
  16. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
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Cited by:
  1. Paul Heidhues & Botond Köszegi, 2004. "The Impact of Consumer Loss Aversion on Pricing," CIG Working Papers SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  2. Nocke, Volker & Peitz, Martin, 2003. "Hyperbolic discounting and secondary markets," Games and Economic Behavior, Elsevier, vol. 44(1), pages 77-97, July.
  3. Jeffrey Shulman & Anne Coughlan, 2007. "Used goods, not used bads: Profitable secondary market sales for a durable goods channel," Quantitative Marketing and Economics, Springer, vol. 5(2), pages 191-210, June.
  4. Fabian Herweg & Daniel Müller, 2011. "Performance of procrastinators: on the value of deadlines," Theory and Decision, Springer, vol. 70(3), pages 329-366, March.

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