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Habits, Market Power, and Policy Selection

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Author Info

  • Luca Bossi

    ()
    (Department of Economics, University of Miami)

  • Vladimir Petkov

    ()
    (School of Economics and Finance, Victoria University of Wellington)

Abstract

This paper examines monopolistic behavior in a framework with habit formation and consumer commitment. We show that time consistent output and pricing policies yield di®erent market outcomes. Policy selection determines the strategic properties of the producer's intra-personal game: current and future quantities are strategic com- plements, while current and future prices are strategic substitutes. In both a simple two-period model and an in¯nite-horizon model, we ¯nd that pricing policies allow the monopolist to attain higher equilibrium pro¯ts.

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Bibliographic Info

Paper provided by University of Miami, Department of Economics in its series Working Papers with number 0702.

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Length: 18 pages
Date of creation: 17 May 2007
Date of revision:
Publication status: Forthcoming: Under Review
Handle: RePEc:mia:wpaper:0702

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Related research

Keywords: Habit persistence; monopoly; time consistency;

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References

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  1. Gary S. Becker & Michael Grossman & Kevin M. Murphy, 1990. "An Empirical Analysis of Cigarette Addiction," NBER Working Papers 3322, National Bureau of Economic Research, Inc.
  2. Benabou, R. & Tirole, J., 2001. "Willpower and Personal Rules," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 216, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
  5. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  6. Karp, Larry, 1995. "Monopoly Power can be Disadvantageous in the Extraction of a Durable Nonrenewable Resource," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series, Department of Agricultural & Resource Economics, UC Berkeley qt4cs0m1vb, Department of Agricultural & Resource Economics, UC Berkeley.
  7. Igal Hendel & Paolo Dudine & Alessandro Lizzeri, 2006. "Storable Good Monopoly: The Role of Commitment," American Economic Review, American Economic Association, vol. 96(5), pages 1706-1719, December.
  8. Driskill, Robert & McCafferty, Stephen, 2001. "Monopoly and Oligopoly Provision of Addictive Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 43-72, February.
  9. Messinis, George, 1999. " Habit Formation and the Theory of Addiction," Journal of Economic Surveys, Wiley Blackwell, vol. 13(4), pages 417-42, September.
  10. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
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Cited by:
  1. Luca Bossi, 2007. "Per Unit Versus As Valorem Taxes Under Dynamic Monopoly," Working Papers, University of Miami, Department of Economics 0703, University of Miami, Department of Economics.
  2. Luca Bossi & Pedro Gomis-Porqueras & David L. Kelly, 2007. "Optimal Second Best Taxation of Addictive Goods," Working Papers, University of Miami, Department of Economics 0708, University of Miami, Department of Economics.

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