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Perishable Durable Goods

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  • Leonardo Rezende

    (Catholic University Sao Paulo)

  • In-Koo Cho

    (University of Illinois)

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    Abstract

    We examine whether the Coase conjecture (Coase [1972], Stokey [1981], Bulow [1982], Gul, Sonnenschein and Wilson [1986]) is robust against slight ability of commitment of the monopolist not to sell the durable goods to consumers with a reservation value higher than the marginal production cost. We quantify the commitment ability in terms of the speed that the durable goods perish instead of the time interval between the offers. We demonstrate that the slight commitment capability makes a substantial difference by constructing two kinds of reservation price equilibria (Gul, Sonnenschein and Wilson [1986]) that refute the Coase conjecture. In the first equilibrium, the monopolist can credibly delay to make an acceptable offer. Almost all consumers are served, but only after very long delay. As a result, the total gains from trading is arbitrarily small. In the second equilibrium, the monopolist's expected profit can be made close to the static monopoly profit, if the goods perish very slowly. This result differs from (Bond and Samuelson [1984]) where the good is depreciated after being delivered to the consumers, because the difference from the competitive equilibrium outcome does not vanish even if the time between the offers and the rate of decay converge to 0. By using the first kind of reservation price equilibrium as a credible threat against the seller, we can obtain the Folk theorem. Various extensions are discussed.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 453.

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    Date of creation: 2007
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    Handle: RePEc:red:sed007:453

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    References

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    1. Faruk Gul & Hugo Sonnenschein & Robert Wilson, 2010. "Foundations of Dynamic Monopoly and the Coase Conjecture," Levine's Working Paper Archive 232, David K. Levine.
    2. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
    3. Ausubel, Lawrence M & Deneckere, Raymond J, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Econometrica, Econometric Society, vol. 57(3), pages 511-31, May.
    4. Admati, Anat R & Perry, Motty, 1987. "Strategic Delay in Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 54(3), pages 345-64, July.
    5. Eric W. Bond & Larry Samuelson, 1984. "Durable Good Monopolies with Rational Expectations and Replacement Sales," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 336-345, Autumn.
    6. Larry M. Ausubel & Raymond J. Deneckere, 1989. "Reputation in Bargaining and Durable Goods Monopoly," Levine's Working Paper Archive 201, David K. Levine.
    7. Sobel, Joel & Takahashi, Ichiro, 1983. "A Multistage Model of Bargaining," Review of Economic Studies, Wiley Blackwell, vol. 50(3), pages 411-26, July.
    8. Yossi Feinberg & Andrzej Skrzypacz, 2005. "Uncertainty about Uncertainty and Delay in Bargaining," Econometrica, Econometric Society, vol. 73(1), pages 69-91, 01.
    9. 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. Johannes Horner & Larry Samuelson, 2009. "Managing Strategic Buyers," Levine's Working Paper Archive 814577000000000059, David K. Levine.

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