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Hyperbolic Discounting and Secondary Markets

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  • Volker Nocke
  • Martin Peitz

Abstract

We study the effect of hyperbolic discounting on competitive equilibria in secondary markets for a durable good. Under exponential discounting, secondary markets are irrelevant in our model. They do not affect the price in the initial period and are neutral to the allocation. Under hyperbolic discounting, secondary markets are not neutral; they do not affect price and allocation. The price in the unique competitive Markov equilibrium is lower than the price in the absence of secondary markets. This affects the equilibrium supply of the durable good in the initial period. We characterise all stationary competitive equilibria in terms of prices. In particular, we obtain that there are stationary competitive equilibria in which trade occurs in each period and the allocation of the durable good is inefficient. Furthermore, we show that there exist competitive equilibria with increasing, decreasing, and cycling price paths, despite the stationarity of the market environment.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2001-W17.

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Date of creation: 01 Dec 2002
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Handle: RePEc:oxf:wpaper:2001-w17

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Keywords: hyperbolic; discounting; secondary markets; durable good; time inconsistency;

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References

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  8. Nocke, Volker & Peitz, Martin, 2003. "Hyperbolic discounting and secondary markets," Games and Economic Behavior, Elsevier, Elsevier, vol. 44(1), pages 77-97, July.
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  12. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
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  15. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, Elsevier, vol. 8(3), pages 201-207.
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Cited by:
  1. Volker Nocke & Martin Peitz, 2002. "Hyperbolic Discounting and Secondary Markets," Economics Series Working Papers 2001-W17, University of Oxford, Department of Economics.
  2. Paul Heidhues & Botond Köszegi, 2004. "The Impact of Consumer Loss Aversion on Pricing," CIG Working Papers, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG) SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
  3. Jeffrey Shulman & Anne Coughlan, 2007. "Used goods, not used bads: Profitable secondary market sales for a durable goods channel," Quantitative Marketing and Economics, Springer, Springer, vol. 5(2), pages 191-210, June.
  4. Fabian Herweg & Daniel Müller, 2008. "Performance of Procrastinators: On the Value of Deadlines," Bonn Econ Discussion Papers, University of Bonn, Germany bgse3_2008, University of Bonn, Germany.

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