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Capacity Choice Counters the Coase Conjecture

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  • Thomas Wiseman
  • R. Preston McAfee

Abstract

The Coase conjecture (1972) is the proposition that a durable-goods monopolist, who sells over time and can quickly reduce prices as sales are made, will price at marginal cost. We show that an arbitrarily small deviation from Coase's assumptions—a deviation that applies in almost any practical application—results in the failure of that conjecture. In particular, we examine that conjecture in a model where there is a vanishingly small cost for production (or sales) capacity, and the seller may augment capacity in every period. In the "gap case", any positive capacity cost ensures that in the limit, as the size of the gap and the time between sales periods shrink, the monopolist obtains profits identical to those that would prevail when she could commit ex ante to a fixed capacity. Those profits are at least 29.8% of the full static monopoly optimum. Copyright 2008, Wiley-Blackwell.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 636.

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Date of creation: 2005
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Handle: RePEc:red:sed005:636

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  1. Levine, David K & Pesendorfer, Wolfgang, 1995. "When Are Agents Negligible?," American Economic Review, American Economic Association, vol. 85(5), pages 1160-70, December.
  2. Wilson, Robert, 1997. "Nonlinear Pricing," OUP Catalogue, Oxford University Press, number 9780195115826, September.
  3. Faruk Gul & Hugo Sonnenschein & Robert Wilson, 2010. "Foundations of Dynamic Monopoly and the Coase Conjecture," Levine's Working Paper Archive 232, David K. Levine.
  4. Drew Fudenberg & David K. Levine & Jean Tirole, 1985. "Infinite-Horizon Models of Bargaining with One-Sided Incomplete Information," Levine's Working Paper Archive 1098, David K. Levine.
  5. 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.
  6. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
  7. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  8. McAfee, R. Preston & Vincent, Daniel, 1997. "Sequentially Optimal Auctions," Games and Economic Behavior, Elsevier, vol. 18(2), pages 246-276, February.
  9. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
  10. Kahn, Charles M, 1986. "The Durable Goods Monopolist and Consistency with Increasing Costs," Econometrica, Econometric Society, vol. 54(2), pages 275-94, March.
  11. Sobel, Joel, 1991. "Durable Goods Monopoly with Entry of New Consumers," Econometrica, Econometric Society, vol. 59(5), pages 1455-85, September.
  12. Pesendorfer, Wolfgang, 1995. "Design Innovation and Fashion Cycles," American Economic Review, American Economic Association, vol. 85(4), pages 771-92, September.
  13. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
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Cited by:
  1. Roman Inderst, 2008. "Dynamic Bilateral Bargaining under Private Information with a Sequence of Potential Buyers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 220-236, January.
  2. Wilner, Lionel, 2014. "Intertemporal price discrimination in infinite horizon," Economics Letters, Elsevier, vol. 122(2), pages 358-361.
  3. Abreu, Dilip & Pearce, David G. & Stacchetti, Ennio, 0. "One-sided uncertainty and delay in reputational bargaining," Theoretical Economics, Econometric Society.
  4. Johannes Horner & Larry Samuelson, 2009. "Managing Strategic Buyers," Levine's Working Paper Archive 814577000000000059, David K. Levine.
  5. Mak, Vincent & Rapoport, Amnon & Gisches, Eyran J., 2012. "Competitive dynamic pricing with alternating offers: Theory and experiment," Games and Economic Behavior, Elsevier, vol. 75(1), pages 250-264.
  6. Xu, Frances Zhiyun, 2011. "Optimal best-price policy," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 628-643, September.
  7. Johannes Horner & Larry Samuelson, 2008. "Managing Strategic Buyers," Cowles Foundation Discussion Papers 1684R, Cowles Foundation for Research in Economics, Yale University, revised Sep 2010.
  8. Johannes Horner & Larry Samuelson, 2010. "Managing Strategic Buyers," Levine's Working Paper Archive 661465000000000279, David K. Levine.
  9. Johannes Horner & Larry Samuelson, 2011. "Managing Strategic Buyers," Levine's Working Paper Archive 786969000000000025, David K. Levine.

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