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How to Commit to a Future Price

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  • Keisuke Hattori

    ()
    (Osaka University of Economics)

  • Amihai Glazer

    ()
    (Department of Economics, University of California-Irvine)

Abstract

Consider a monopolist which sells a durable good and also consumables that require use of the durable good. After the firm sells the durable good, it has an incentive to charge a price greater than marginal cost for the consumables. Realizing that they will have to pay a high price for consumables, consumers would be willing to pay only a low price for the durable good, reducing the firm's profits. The paper considers three mechanisms which would induce the firm to charge a low price for the consumables. First, it can enter into a financial contract paying a lump-sum fee in return for a per-unit subsidy for the selling the consumable. Second, the seller can allow entry into the market for the consumable. Third, the firm may sell the durable good at a low price to consumers who little value the durable and consumable, so that it will have an incentive to later set a low price for the consumable.

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Bibliographic Info

Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 131402.

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Length: 22 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:irv:wpaper:131402

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Keywords: Pricing commitment; Durable goods;

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  1. Farrell, Joseph & Gallini, Nancy T., 1987. "Second-sourcing as a Commitment: Monopoly Incentives to Attract Competition," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt4zr9b9dr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 15(1), pages 143-49, April.
  3. Hodaka Morita & Michael Waldman, 2004. "Durable Goods, Monopoly Maintenance, and Time Inconsistency," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 13(2), pages 273-302, 06.
  4. Farrell, Joseph & Shapiro, Carl, 1987. "Optimal Contracts with Lock-In," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt19f324hf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Kahn, Charles M, 1986. "The Durable Goods Monopolist and Consistency with Increasing Costs," Econometrica, Econometric Society, Econometric Society, vol. 54(2), pages 275-94, March.
  6. Zhiqi Chen & Tom Ross, 1996. "Orders to Supply as Substitutes for Commitments to Aftermarkets," Carleton Industrial Organization Research Unit (CIORU), Carleton University, Department of Economics 96-02, Carleton University, Department of Economics.
  7. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(2), pages 314-32, April.
  8. Morita, Hodaka & Waldman, Michael, 2006. "Competition, Monopoly Maintenance, and Consumer Switching Costs," MPRA Paper 1426, University Library of Munich, Germany.
  9. Hagiu Andrei, 2007. "Merchant or Two-Sided Platform?," Review of Network Economics, De Gruyter, De Gruyter, vol. 6(2), pages 1-19, June.
  10. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(3), pages 220-233.
  11. Simon Board & Marek Pycia, 2014. "Outside Options and the Failure of the Coase Conjecture," American Economic Review, American Economic Association, American Economic Association, vol. 104(2), pages 656-71, February.
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