A durable-goods monopolist may use quality degradation as a commitment not to lower price in the future. The introduction of damaged goods expedites lowvaluation consumers? future demands, and helps the firm to mitigate the Coasian time-consistency problem. In such a case, damaged goods are more likely to be observed relative to the static setting where only the price-discrimination aspect of quality degradation is in effect. However, it is more likely to reduce welfare by inducing low-valuation buyers to buy the low-quality good early rather than to wait and buy the high-quality good later. So, quality degradation of durable goods is more likely to occur but less promising to the society, relative to the case of nondurable goods where damaged goods are rarely observed but more likely to be Paretoimproving.
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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number
KERP 2002/21.
Length: 26 pages Date of creation: Oct 2002 Date of revision: Publication status: Published in Rand Journal of Economics, Vol. 37, Number 1, Spring 2006 Handle: RePEc:kee:kerpuk:2002/21
Note: This paper has been circulated with the title ‘‘Quality Degradation by a Durable-Goods Monopolist’’. I thank Roger Hartley and seminar participants at Keele and 2002 EARIE conference at Madrid for helpful discussions and comments. Contact details of provider: Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom Phone: +44 (0)1782 584581 Fax: +44 (0)1782 717577 Email: Web page: http://www.keele.ac.uk/depts/ec/cer/ More information through EDIRC
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Find related papers by JEL classification: D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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