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Durable Goods Monopoly and Product Quality

Author

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  • Jong-Hee Hahn

    () (Keele University, Department of Economics)

Abstract

This paper examines how a durable-goods monopolist’s choice of product quality interacts with time inconsistency problems in an environment, where the firm faces an irreversible decision on quality and unit production costs increase in quality. The monopolist may have incentives to choose a high quality in order to mitigate the time-inconsistency problem, which counters the standard quality underprovision incentive due to the lack of commitment. Depending on the relative strength of the two opposing forces, the monopolist may increase or decrease quality relative to the optimal commitment or rental level. Its welfare implications are also discussed, and it is shown that the lack of commitment power may be socially harmful in contrast to the prediction in the traditional theory of durable-goods monopoly pricing.

Suggested Citation

  • Jong-Hee Hahn, 2005. "Durable Goods Monopoly and Product Quality," Keele Economics Research Papers KERP 2005/12, Centre for Economic Research, Keele University.
  • Handle: RePEc:kee:kerpuk:2005/12
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    File URL: http://www.keele.ac.uk/depts/ec/wpapers/kerp0512.pdf
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    Keywords

    Durable-goods monopoly; Product quality; Time consistency; Commitment.;

    JEL classification:

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

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