Durable Goods Monopoly and Product Quality
AbstractThis paper examines how a durable-goods monopolist’s choice of product quality interacts with time inconsistency problems in an environment, where the firm faces an irreversible decision on quality and unit production costs increase in quality. The monopolist may have incentives to choose a high quality in order to mitigate the time-inconsistency problem, which counters the standard quality underprovision incentive due to the lack of commitment. Depending on the relative strength of the two opposing forces, the monopolist may increase or decrease quality relative to the optimal commitment or rental level. Its welfare implications are also discussed, and it is shown that the lack of commitment power may be socially harmful in contrast to the prediction in the traditional theory of durable-goods monopoly pricing.
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Bibliographic InfoPaper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2005/12.
Length: 29 pages
Date of creation: Aug 2005
Date of revision:
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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
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
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