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How to Commit to a Future Price

  • Keisuke Hattori

    ()

    (Osaka University of Economics)

  • Amihai Glazer

    ()

    (Department of Economics, University of California-Irvine)

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.

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File URL: http://www.economics.uci.edu/files/docs/workingpapers/2013-14/glazer-02.pdf
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Paper provided by University of California-Irvine, Department of Economics in its series Working Papers with number 131402.

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Length: 22 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:irv:wpaper:131402
Contact details of provider: Postal: Irvine, CA 92697-3125
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Web page: http://www.economics.uci.edu/

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  1. Joseph Farrell and Carl Shapiro., 1987. "Optimal Contracts with Lock-In," Economics Working Papers 8758, University of California at Berkeley.
  2. Zhiqi Chen & Thomas W. Ross, 1998. "Orders to Supply as Substitutes for Commitments to Aftermarkets," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1204-1224, November.
  3. Hodaka Morita & Michael Waldman, 2010. "Competition, Monopoly Maintenance, and Consumer Switching Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 230-55, February.
  4. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  5. Kahn, Charles M, 1986. "The Durable Goods Monopolist and Consistency with Increasing Costs," Econometrica, Econometric Society, vol. 54(2), pages 275-94, March.
  6. Hodaka Morita & Michael Waldman, 2004. "Durable Goods, Monopoly Maintenance, and Time Inconsistency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 273-302, 06.
  7. Joseph Farrell and Nancy T. Gallini., 1987. "Second-Sourcing as a Commitment: Monopoly Incentives to Attract Competition," Economics Working Papers 8760, University of California at Berkeley.
  8. Simon Board & Marek Pycia, 2014. "Outside Options and the Failure of the Coase Conjecture," American Economic Review, American Economic Association, vol. 104(2), pages 656-71, February.
  9. Nakamura, Emi & Steinsson, Jón, 2011. "Price setting in forward-looking customer markets," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 220-233.
  10. Hagiu Andrei, 2007. "Merchant or Two-Sided Platform?," Review of Network Economics, De Gruyter, vol. 6(2), pages 1-19, June.
  11. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
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