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Hyperbolic Discounting and Secondary Markets

Author

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  • Volker Nocke

    (Nuffield College, Oxford)

  • Martin Pietz

    (Temporary Address: Fundamentos Analisis Economico, Universidad de Alicante)

Abstract

We study the effect of hyperbolic discounting on competitive equilibria in secondary markets for a durable good. Under exponential discounting, secondary markets are irrelevant in our model. They do not affect the price in the initial period and are neutral to the allocation. Under hyperbolic discounting, secondary markets are not neutral: they do affect price and allocation. The price in the unique competitive Markov equilibrium is lower than the price in the absence of secondary markets. This affects the equilibrium supply of the durable good in the initial period. We characterise all stationary competitive equilibria in terms of prices. In particular, we obtain that there are stationary competitive equilibria in which trade occurs in each period and the allocation of the durable good is inefficient. Furthermore, we show that there exist competitive equilibria with increasing, decreasing, and cycling price paths, despite the stationarity of the market environment.

Suggested Citation

  • Volker Nocke & Martin Pietz, 2001. "Hyperbolic Discounting and Secondary Markets," Economics Papers 2001-W17, Economics Group, Nuffield College, University of Oxford.
    • Handle: RePEc:nuf:econwp:0117
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    References listed on IDEAS

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    Cited by:

    1. Paul Heidhues & Botond Köszegi, 2004. "The Impact of Consumer Loss Aversion on Pricing," CIG Working Papers SP II 2004-17, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    2. Fabian Herweg & Daniel Müller, 2011. "Performance of procrastinators: on the value of deadlines," Theory and Decision, Springer, vol. 70(3), pages 329-366, March.
    3. Jeffrey Shulman & Anne Coughlan, 2007. "Used goods, not used bads: Profitable secondary market sales for a durable goods channel," Quantitative Marketing and Economics (QME), Springer, vol. 5(2), pages 191-210, June.
    4. Murooka, Takeshi & Schwarz, Marco A., 2018. "The timing of choice-enhancing policies," Journal of Public Economics, Elsevier, vol. 157(C), pages 27-40.
    5. Nocke, Volker & Peitz, Martin, 2003. "Hyperbolic discounting and secondary markets," Games and Economic Behavior, Elsevier, vol. 44(1), pages 77-97, July.
    6. Juan D. Carrillo & Mathias Dewatripont, 2008. "Promises, Promises, …," Economic Journal, Royal Economic Society, vol. 118(531), pages 1453-1473, August.
    7. Heidhues, Paul & Köszegi, Botond, 2018. "Behavioral Industrial Organization," CEPR Discussion Papers 12988, C.E.P.R. Discussion Papers.
    8. Kang, Jingoo & Kang, Minwook, 2022. "Durable goods as commitment devices under quasi-hyperbolic discounting," Journal of Mathematical Economics, Elsevier, vol. 99(C).
    9. Sanjay Jain, 2019. "Time Inconsistency and Product Design: A Strategic Analysis of Feature Creep," Marketing Science, INFORMS, vol. 38(5), pages 835-851, September.
    10. Antino Kim & Rajib L. Saha & Warut Khern-am-nuai, 2021. "Manufacturer’s “1-Up” from Used Games: Insights from the Secondhand Market for Video Games," Information Systems Research, INFORMS, vol. 32(4), pages 1173-1191, December.

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    More about this item

    Keywords

    hyperbolic discounting; secondary markets; durable good; time inconsistency;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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