Intertemporal Quality Discrimination
New technology is usually expensive and it takes time for manufacturers to make the technology more accessible. In the stereo industry, the first Super Audio Compact Disk (SACD) player made by Sony, SCD-1, sold for $5,000 in 1999; in 2002 the cheapest of Sony's new SACD players, SCD-CE775, had a $250 MSRP, while the SCD-1 continued to be Sony's flagship model. The electrostatic speaker manufacturer MartinLogan developed a technology trademarked ClearSpars for their Statement e2 speakers, which came to the market in 2000 with a list price of $80,000 per pair. MartinLogan later applied the technology to their mid-price ($3300 per pair) Aeon i in 2003. The amplifier manufacturer Conrad-Johnson introduced in 2000 its current top pre-amplifier, ART Series 2, and in 2003 added to their product line a stripped-down version of the ART, the Premier 17LS, whose price is less than one-third the price of the ART. The four-wheel-drive vehicle manufacturer Land Rover introduced their mid-price model Discovery in 1986, after they remodeled their luxury line Range Rover in the early 80s. In these examples, before the firms could scale down their new technologies for the mass markets, they sold only the high-end products; and after the more affordable low-end products became available, they sold both kinds of products. Furthermore, these products are durable goods, and so by the time the firms introduced the low-end products, the consumers who had bought the high-end products were no longer in the market. In this paper we abstract from the inter-firm competition. That is, we assume that the durable goods market is monopoly, and study the quality decision and the pricing of the durable goods monopolist whose first-generation product has higher quality than the second-generation one, which is not available at the time the first-generation product is first introduced to the market. In addition to Coasian dynamics, or intertemporal price discrimination, the issue involves intertemporal quality discrimination. Our analysis focuses on whether the monopolist would produce goods with qualities higher than the optimum. In static quality (or quantity) discrimination models, where a monopolist can use several quality-price packages to screen consumers, it is well known that a monopolist would discriminate the consumers by offering the efficient quality only to the consumer with the highest valuation, and offering everyone else a quality less than the optimum. In no circumstances could the consumers get above-optimum quality in the static model. [See Mussa and Rosen (1978) and Maskin and Riley (1984).] However, in our model of intertemporal quality discrimination, we find that the monopolist will produce goods of above-optimum quality in its product line when the discount factor is small.
|Date of creation:||11 Aug 2004|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Wang, Ruqu, 2001. "Optimal pricing strategy for durable-goods monopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 789-804, May.
- Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-332, April.
- Chi, Woody Chih-Yi, 1999. "Quality choice and the Coase problem," Economics Letters, Elsevier, vol. 64(1), pages 107-115, July.
- Jeremy Bulow, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 729-749.
- Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
When requesting a correction, please mention this item's handle: RePEc:ecm:feam04:660. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.