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Damaged Durable Goods

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  • Jong-Hee Hahn

    ()
    (Department of Economics, Keele University, Keele,)

Abstract

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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Bibliographic Info

Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2002/21.

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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.
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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Damaged Goods; Quality Degradation; Durable-Goods Monopoly; Time-Consistency;

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References

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  1. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  2. Bagnoli, Mark & Salant, Stephen W & Swierzbinski, Joseph E, 1995. "Intertemporal Self-Selection with Multiple Buyers," Economic Theory, Springer, vol. 5(3), pages 513-26, May.
  3. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  4. Jong-Hee Hahn, 2001. "The Welfare Effect of Quality Degradation in the Presence of Network Externalities," Keele Department of Economics Discussion Papers (1995-2001) 2001/08, Department of Economics, Keele University, revised Feb 2003.
  5. Lee, In Ho & Lee, Jonghwa, 1998. "A Theory of Economic Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 46(3), pages 383-401, September.
  6. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  7. Choi, J.P., 1991. "Network Externality, Compatibility Choice, and Planned Obsolescence," Discussion Papers 1991_67, Columbia University, Department of Economics.
  8. von der Fehr, Nils-Henrik Morch & Kuhn, Kai-Uwe, 1995. "Coase versus Pacman: Who Eats Whom in the Durable-Goods Monopoly?," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 785-812, August.
  9. Bagnoli, Mark & Salant, Stephen W & Swierzbinski, Joseph E, 1989. "Durable-Goods Monopoly with Discrete Demand," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1459-78, December.
  10. Takeyama, Lisa N, 2002. "Strategic Vertical Differentiation and Durable Goods Monopoly," Journal of Industrial Economics, Wiley Blackwell, vol. 50(1), pages 43-56, March.
  11. Butz, David A, 1990. "Durable-Good Monopoly and Best-Price Provisions," American Economic Review, American Economic Association, vol. 80(5), pages 1062-76, December.
  12. Jong-Hee Hahn, 2000. "Functional Quality Degradation of Software with Network Externalities," Keele Department of Economics Discussion Papers (1995-2001) 2000/12, Department of Economics, Keele University, revised Jan 2001.
  13. Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 729-49, November.
  14. repec:fth:coluec:564 is not listed on IDEAS
  15. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  16. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
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Citations

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Cited by:
  1. Ding, Yucheng, 2014. "Why Branded Firm may Benefit from Counterfeit Competition," MPRA Paper 52933, University Library of Munich, Germany.
  2. McAfee, R. Preston, 2007. "Pricing Damaged Goods," Economics Discussion Papers 2007-2, Kiel Institute for the World Economy.
  3. Jay Pil Choi & Byung-Cheol Kim, 2008. "Net Neutrality and Investment Incentives," Working Papers 08-03, NET Institute.
  4. Jong-Hee Hahn, 2004. "Durable Goods Monopoly with Endogenous Quality," Econometric Society 2004 Far Eastern Meetings 665, Econometric Society.
  5. Saracho, Ana I., 2011. "Licensing information goods," International Journal of Industrial Organization, Elsevier, vol. 29(2), pages 187-199, March.
  6. Gergely Csorba & Jong-Hee Hahn, 2006. "FUNCTIONAL DEGRADATION AND ASYMMETRIC NETWORK EFFECTS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(2), pages 253-268, 06.

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