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Monopoly, Time Consistency, and Dynamic Demands

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  • Luca Bossi

    ()

  • Vladimir Petkov

    ()

Abstract

This paper examines monopolistic behavior in a framework with dynamic demands. We show that time consistent output and pricing policies yield different equilibrium outcomes in terms of profits and welfare. In a simple two-period model, we find that pricing policies impose less restrictive constraints on a producer of addictive goods, allowing him to attain higher equilibrium profits. In contrast, a durable goods producer is better off implementing output policies. We study the effect of instrument selection on the strategic properties of the monopolist’s intra- personal game. Intertemporal substitutabilities imply that current and future prices are strategic complements, while current and future output levels may be strategic substitutes. Intertemporal complementarities reverse the strategic properties of these instruments. Copyright Springer Science+Business Media New York 2013

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File URL: http://hdl.handle.net/10.1007/s10842-012-0130-0
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Bibliographic Info

Article provided by Springer in its journal Journal of Industry, Competition and Trade.

Volume (Year): 13 (2013)
Issue (Month): 3 (September)
Pages: 339-359

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Handle: RePEc:kap:jincot:v:13:y:2013:i:3:p:339-359

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Web page: http://springerlink.metapress.com/link.asp?id=105724

Related research

Keywords: dynamic demands; monopoly; time consistency; D11; D42; L12;

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References

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  1. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  2. Jean-Michel Chevet & Sebastien Lecocq & Michael Visser, 2011. "Climate, Grapevine Phenology, Wine Production, and Prices: Pauillac (1800-2009)," American Economic Review, American Economic Association, vol. 101(3), pages 142-46, May.
  3. Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 729-49, November.
  4. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1261-1303, November.
  5. Gul, Faruk & Sonnenschein, Hugo & Wilson, Robert, 1986. "Foundations of dynamic monopoly and the coase conjecture," Journal of Economic Theory, Elsevier, vol. 39(1), pages 155-190, June.
  6. Kahn, Charles M, 1986. "The Durable Goods Monopolist and Consistency with Increasing Costs," Econometrica, Econometric Society, vol. 54(2), pages 275-94, March.
  7. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
  8. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
  9. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
  10. Fethke, Gary & Jagannathan, Raj, 1996. "Habit persistence, heterogeneous tastes, and imperfect competition," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1193-1207.
  11. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  12. Mirman, Leonard J, 1971. "Uncertainty and Optimal Consumption Decisions," Econometrica, Econometric Society, vol. 39(1), pages 179-85, January.
  13. Eric W. Bond & Larry Samuelson, 1984. "Durable Good Monopolies with Rational Expectations and Replacement Sales," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 336-345, Autumn.
  14. Driskill, Robert & McCafferty, Stephen, 2001. "Monopoly and Oligopoly Provision of Addictive Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 43-72, February.
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