A continuous time dynamic price and quantity game is analysed between the seller and the consumer of an addictive substance. Consumption dynamics are modelled using a Becker Murphy rational addiction model. Conditional on the buyer's consumption strategy, a monopoly seller manipulates the price to maximise current value profits. The seller sets a low price at first and then raises the price as the consumer becomes addicted. The consumer understands this, and consumes less than would a myopic agent.
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Length: 32 pages Date of creation: 1998 Date of revision: Handle: RePEc:mlb:wpaper:632
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