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Monopoly, Time Consistency, and Dynamic Demands

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  • Luca Bossi
  • Vladimir Petkov

Abstract

This paper examines monopolistic behavior in a framework with dynamic demands. We show that time consistent output and pricing policies yield different equilibrium outcomes in terms of profits and welfare. In a simple two-period model, we find that pricing policies impose less restrictive constraints on a producer of addictive goods, allowing him to attain higher equilibrium profits. In contrast, a durable goods producer is better off implementing output policies. We study the effect of instrument selection on the strategic properties of the monopolist’s intra- personal game. Intertemporal substitutabilities imply that current and future prices are strategic complements, while current and future output levels may be strategic substitutes. Intertemporal complementarities reverse the strategic properties of these instruments. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Luca Bossi & Vladimir Petkov, 2013. "Monopoly, Time Consistency, and Dynamic Demands," Journal of Industry, Competition and Trade, Springer, vol. 13(3), pages 339-359, September.
    • Handle: RePEc:kap:jincot:v:13:y:2013:i:3:p:339-359
    DOI: 10.1007/s10842-012-0130-0
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    References listed on IDEAS

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    More about this item

    Keywords

    dynamic demands; monopoly; time consistency; D11; D42; L12;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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