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How to Commit to a Future Price

Author

Listed:
  • Keisuke Hattori

    (Osaka University of Economics)

  • Amihai Glazer

    (Department of Economics, University of California-Irvine)

Abstract

Consider a monopolist which sells a durable good and also consumables that require use of the durable good. After the firm sells the durable good, it has an incentive to charge a price greater than marginal cost for the consumables. Realizing that they will have to pay a high price for consumables, consumers would be willing to pay only a low price for the durable good, reducing the firm's profits. The paper considers three mechanisms which would induce the firm to charge a low price for the consumables. First, it can enter into a financial contract paying a lump-sum fee in return for a per-unit subsidy for the selling the consumable. Second, the seller can allow entry into the market for the consumable. Third, the firm may sell the durable good at a low price to consumers who little value the durable and consumable, so that it will have an incentive to later set a low price for the consumable.

Suggested Citation

  • Keisuke Hattori & Amihai Glazer, 2013. "How to Commit to a Future Price," Working Papers 131402, University of California-Irvine, Department of Economics.
    • Handle: RePEc:irv:wpaper:131402
    as

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    File URL: https://www.economics.uci.edu/files/docs/workingpapers/2013-14/glazer-02.pdf
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    References listed on IDEAS

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    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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