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Quality Uncertainty and Time Inconsistency in a Durable Good Market

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  • Evrim Dener

    ()
    (SMU)

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    Abstract

    In a durable good monopoly where consumers cannot observe quality prior to purchase and product improvement occurs exogenously over time, we show that uncertainty in quality may resolve the time inconsistency problem (even for low levels of product improvement). Higher dispersion in quality creates greater demand for future product by increasing the incentive of buyers with inferior quality realizations to repurchase and this, in turn, reduces the incentive of the seller to cut future price. For various levels of product improvement, we characterize the range of quality uncertainty for which the market equilibrium is identical to one where the monopolist can credibly precommit to future prices. We also show that the presence of quality uncertainty can lead to no trading in the primary good market.

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    File URL: ftp://ftp1.economics.smu.edu/WorkingPapers/2007/Dener/Dener.pdf
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    Bibliographic Info

    Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0707.

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    Length: 23 pages
    Date of creation: Sep 2007
    Date of revision:
    Handle: RePEc:smu:ecowpa:707

    Contact details of provider:
    Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
    Phone: 214-768-2715
    Fax: 214-768-1821
    Web page: http://www.smu.edu/economics

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    Keywords: durable goods; dynamic inconsistency; quality uncertainty;

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    1. Jae Nahm, 2004. "Durable-Goods Monopoly with Endogenous Innovation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 303-319, 06.
    2. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    3. Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 61-92, April.
    4. Michael Waldman, 1996. "Planned Obsolescence and the R&D Decision," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 583-595, Autumn.
    5. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
    6. Daniel A. Levinthal & Devavrat Purohit, 1989. "Durable Goods and Product Obsolescence," Marketing Science, INFORMS, vol. 8(1), pages 35-56.
    7. 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.
    8. Bulow, Jeremy, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 729-49, November.
    9. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
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