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Inter-temporal Price Discrimination with Time Inconsistent Consumers

  • Yianis Sarafidis
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    This paper looks at the inter-temporal price discrimination game that arises when a monopolist faces naïve-time-inconsistent consumers. En route to solving this game, we introduce two new solution concepts for dynamic games where some players are time inconsistent. The first solution concept is similar in spirit to the subgame perfect Nash equilibrium, whereas the second one relies on backwards induction. Unlike in standard finite games, these solution concepts are not equivalent, even with perfect information. We then use these solution concepts to solve the inter-temporal pricing game with time inconsistent consumers. We derive implications for monopoly profits, consumer welfare and the path of prices (Coase conjecture). We conclude that time inconsistency will reduce monopoly profits and the welfare of all consumers, except of the highest valuation ones. Moreover, with time inconsistent consumers the path of prices will approach marginal cost, but at a lower rate

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    Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 479.

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    Date of creation: 11 Aug 2004
    Date of revision:
    Handle: RePEc:ecm:nasm04:479
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    1. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
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    9. Faruk Gul & Hugo Sonnenschein & Robert Wilson, 2010. "Foundations of Dynamic Monopoly and the Coase Conjecture," Levine's Working Paper Archive 232, David K. Levine.
    10. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
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    12. 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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