Dynamic monopoly with relational incentives
AbstractThis paper studies the price-setting problem of a monopoly that in each time period has the option of failing to deliver its good after receiving payment. The monopoly may be induced to deliver the good if consumers expect that the monopoly will not deliver in the future if it does not deliver today. If the good is non-durable and consumers are anonymous, the monopoly's optimal strategy is to set price equal to the static monopoly price each period if the discount factor is high enough, and otherwise to set the lowest price at which it can credibly promise to deliver the good. If the good is durable, we derive an intuitive lower bound on the monopoly's optimal profit for any discount factor and show that it converges to the optimal static monopoly profit as the discount factor converges to one, in contrast to the Coase conjecture. We also show that rationing the good is never optimal for the monopoly if there is an efficient resale market and that the best equilibrium in which the monopoly always delivers involves a strictly decreasing price path that asymptotes to a level weakly above the ratio of the monopoly's marginal cost to the discount factor.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Econometric Society in its journal Theoretical Economics.
Volume (Year): 5 (2010)
Issue (Month): 3 (September)
Contact details of provider:
Web page: http://econtheory.org
Coase conjecture; durable goods; monopoly pricing; non-durable goods; rationing; relational incentives;
Find related papers by JEL classification:
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Qingmin Liu & Konrad Mierendorff & Xianwen Shi, 2013. "Auctions with Limited Commitment," Working Papers tecipa-504, University of Toronto, Department of Economics.
- Martimort, David & Semenov, Aggey & Stole, Lars, 2014.
"A Theory of Contracts With Limited Enforcement,"
53504, University Library of Munich, Germany.
- Gregory E. Goering, 2012. "Taxation and Durable-Goods Monopoly: Does a Current Tax Influence Firm Behavior?," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 20-28, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Martin J. Osborne).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.