IDEAS home Printed from https://ideas.repec.org/p/ecm/feam04/660.html
   My bibliography  Save this paper

Intertemporal Quality Discrimination

Author

Listed:
  • Woody Chih-yi Chi

Abstract

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.

Suggested Citation

  • Woody Chih-yi Chi, 2004. "Intertemporal Quality Discrimination," Econometric Society 2004 Far Eastern Meetings 660, Econometric Society.
  • Handle: RePEc:ecm:feam04:660
    as

    Download full text from publisher

    File URL: http://repec.org/esFEAM04/up.16547.1080661276.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Wang, Ruqu, 2001. "Optimal pricing strategy for durable-goods monopoly," Journal of Economic Dynamics and Control, Elsevier, vol. 25(5), pages 789-804, May.
    2. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-332, April.
    3. Daniel A. Levinthal & Devavrat Purohit, 1989. "Durable Goods and Product Obsolescence," Marketing Science, INFORMS, vol. 8(1), pages 35-56.
    4. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
    5. Lynn O. Wilson & John A. Norton, 1989. "Optimal Entry Timing for a Product Line Extension," Marketing Science, INFORMS, vol. 8(1), pages 1-17.
    6. Chi, Woody Chih-Yi, 1999. "Quality choice and the Coase problem," Economics Letters, Elsevier, vol. 64(1), pages 107-115, July.
    7. Jeremy Bulow, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 729-749.
    8. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    9. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chih-yi Chi, Woody & Wu, Shufen, 2006. "Intertemporal quality discrimination of a durable good monopolist," Economics Letters, Elsevier, vol. 92(2), pages 184-191, August.
    2. 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.
    3. Chi, Woody Chih-Yi, 1999. "Quality choice and the Coase problem," Economics Letters, Elsevier, vol. 64(1), pages 107-115, July.
    4. Edward Kutsoati & Jan Zabojnik, 2001. "Durable Goods Monopoly, Learning-by-doing and "Sleeping Patents"," Discussion Papers Series, Department of Economics, Tufts University 0105, Department of Economics, Tufts University.
    5. Luca Lambertini, 2007. "Dynamic Spatial Monopoly with Product Development," Spatial Economic Analysis, Taylor & Francis Journals, vol. 2(2), pages 157-166.
    6. Michael Waldman, 2004. "Antitrust Perspectives for Durable-Goods Markets," CESifo Working Paper Series 1306, CESifo.
    7. Gerstle, Ari D. & Waldman, Michael, 2016. "Mergers in durable-goods industries: A re-examination of market power and welfare effects," Research in Economics, Elsevier, vol. 70(4), pages 677-692.
    8. Drew Fudenberg & Jean Tirole, 1998. "Upgrades, Tradeins, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 235-258, Summer.
    9. Francesco Nava & Pasquale Schiraldi, 2019. "Differentiated Durable Goods Monopoly: A Robust Coase Conjecture," American Economic Review, American Economic Association, vol. 109(5), pages 1930-1968, May.
    10. Qiu-Hong Wang & Kai-Lung Hui, 2017. "Technology Mergers and Acquisitions in the Presence of an Installed Base: A Strategic Analysis," Information Systems Research, INFORMS, vol. 28(1), pages 46-63, March.
    11. Kutsoati, Edward & Zabojnik, Jan, 2005. "The effects of learning-by-doing on product innovation by a durable good monopolist," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 83-108, February.
    12. Galiani, Sebastian & Jaitman, Laura & Weinschelbaum, Federico, 2020. "Crime and durable goods," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 146-163.
    13. Tian Xia & Richard Sexton, 2010. "Brand or Variety Choices and Periodic Sales as Substitute Instruments for Monopoly Price Discrimination," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(4), pages 333-349, June.
    14. Veiga, André, 2018. "A note on how to sell a network good," International Journal of Industrial Organization, Elsevier, vol. 59(C), pages 114-126.
    15. Crawford, Gregory S & Shum, Matthew, 2007. "Monopoly Quality Degradation and Regulation in Cable Television," Journal of Law and Economics, University of Chicago Press, vol. 50(1), pages 181-219, February.
    16. Lambertini, Luca, 1997. "On the provision of product quality by a labor-managed monopolist," Economics Letters, Elsevier, vol. 55(2), pages 279-283, August.
    17. Mark Armstrong, 2016. "Nonlinear Pricing," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 583-614, October.
    18. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2010. "Price and quality in spatial competition," Regional Science and Urban Economics, Elsevier, vol. 40(6), pages 471-480, November.

    More about this item

    Keywords

    Coase conjecture; durable goods monoply; quality discrimination; screening;
    All these keywords.

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecm:feam04:660. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.