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Upgrades, Trade-Ins and BuyBacks

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  • Drew Fudenberg
  • Jean Tirole

Abstract

This paper studies the monopoly pricing of overlapping generations of a durable good. We focus on two sorts of goods: those with an active second-hand market and anonymous consumers, such as textbooks, and gods such as software, where there is no second-hand market and consumers are "semi-anonymous," meaning that they can prove that they purchased the old version to qualify for a discount on the new one. In the former case, we find that the sales of the new goods are independent of the existing stock of the old one if the monopolist chooses either to produce or repurchase the old good after the new one becomes available, but that this separation does not hold when the monopolist chooses to be inactive on teh old-good market. Moreover, we identify parameter regions where each of these three possibilities will occur. In the "semi-anonymous" case, we find that if the new good is a sufficiently large improvement the semi-anonymity constraint binds, in that the monopolist would prefer to charge a higher price for upgrades than for sales to new consumers. If the new good is a smaller improvement, then upgrade discounts are optimal, and the outcome is the same as if the monopolist knew exactly which consumers had purchased in the first period. If in addition both goods are essentially costless, then all consumers who purchase the old good upgrade when the new one becomes available. If the old good is costless but the new good is not, and the discount factor is low, there can be "leapfrogging" in that some low-valuation consumers will purchase the new good even though some high-valuation ones purchased the old good at the start and do not upgrade.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1803.

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Date of creation: 1997
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Handle: RePEc:fth:harver:1803

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  1. 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.
  2. Jean-Jacques Laffont & Jean Tirole, 1985. "The Dynamics of Incentive Contracts," Working papers 397, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Choi, J.P., 1991. "Network Externality, Compatibility Choice, and Planned Obsolescence," Discussion Papers 1991_67, Columbia University, Department of Economics.
  4. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  5. repec:fth:coluec:564 is not listed on IDEAS
  6. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  7. John A. Norton & Frank M. Bass, 1987. "A Diffusion Theory Model of Adoption and Substitution for Successive Generations of High-Technology Products," Management Science, INFORMS, vol. 33(9), pages 1069-1086, September.
  8. Waldman, Michael, 1993. "A New Perspective on Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 273-83, February.
  9. Thum, Marcel, 1994. "Network externalities, technological progress, and the competition of market contracts," International Journal of Industrial Organization, Elsevier, vol. 12(2), pages 269-289, June.
  10. Wolfgang Pesendorfer, 1993. "Design Innovation and Fashion Cycles," Discussion Papers 1049, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  12. Daniel A. Levinthal & Devavrat Purohit, 1989. "Durable Goods and Product Obsolescence," Marketing Science, INFORMS, vol. 8(1), pages 35-56.
  13. Lee, I.H. & Lee, J., 1994. "Durable goods monopoly under technological innovation," Discussion Paper Series In Economics And Econometrics 9413, Economics Division, School of Social Sciences, University of Southampton.
  14. Devavrat Purohit, 1994. "What Should You Do When Your Competitors Send in the Clones?," Marketing Science, INFORMS, vol. 13(4), pages 392-411.
  15. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
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Citations

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Cited by:
  1. Ivan Major, 2013. "Information Sharing Among Banks About Borrowers: What Type Would They Support?," IEHAS Discussion Papers 1316, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. Souza, Eduardo Correia de & Batista, Jorge Chami, 2014. "Replacement Cycles, Income Distribution, and Dynamic Price Discrimination," Insper Working Papers wpe_331, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  3. Curtis Taylor & Liad Wagman, 2008. "Who Benefits From Online Privacy?," Working Papers 08-26, NET Institute.
  4. Kai-Lung Hui & Qiu-Hong Wang, 2005. "Delayed Product Introduction," Industrial Organization 0503011, EconWPA.
  5. Anton, James J. & Biglaiser, Gary, 2013. "Quality, upgrades and equilibrium in a dynamic monopoly market," Journal of Economic Theory, Elsevier, vol. 148(3), pages 1179-1212.
  6. Jin-Hyuk Kim, 2008. "Digital Rights Management and Technological Tying," Working Papers 08-05, NET Institute, revised Sep 2008.
  7. Awrey, Dan, 2013. "Toward a supply-side theory of financial innovation," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 401-419.
  8. Jia, Junxiu & Zhang, Jiang, 2013. "Dynamic ordering and pricing strategies in a two-tier multi-generation durable goods supply chain," International Journal of Production Economics, Elsevier, vol. 144(1), pages 135-142.
  9. Juan Ruiz, 2003. "Another Perspective on Planned obsolescence: is there really too much Innovation?," Industrial Organization 0302001, EconWPA.
  10. Qiu_Hong Wang & Kai-Lung Hui, 2005. "Technology Timing and Pricing In the Presence of an Installed Base," Industrial Organization 0512013, EconWPA.
  11. Steven J. Davis & Jack MacCrisken & Kevin M. Murphy, 2001. "Economic Perspectives on Software Design: PC Operating Systems and Platforms," NBER Working Papers 8411, National Bureau of Economic Research, Inc.
  12. Major, Iván, 2008. "Információmegosztás a bankok között. Mikor jó a teljes lista?
    [Sharing of information among banks. When is full-list a good thing?]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 763-781.

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