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Pricing Damaged Goods

  • McAfee, R. Preston

Companies with market power occasionally engage in intentional quality reduction of a portion of their output as a means of offering two qualities of goods for the purpose of price discrimination, even absent a cost saving. This paper provides an exact characterization in terms of marginal revenues of when such a strategy is profitable, which, remarkably, does not depend on the distribution of customer valuations, but only on the value of the damaged product relative to the undamaged product. In particular, when the damaged product provides a constant proportion of the value of the full product, selling a damaged good is unprofitable. One quality reduction produces higher profits than another if the former has higher marginal revenue than the latter.

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2007-2.

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Date of creation: 2007
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Handle: RePEc:zbw:ifwedp:5516
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  1. Jongā€Hee Hahn, 2006. "Damaged durable goods," RAND Journal of Economics, RAND Corporation, vol. 37(1), pages 121-133, 03.
  2. Justin P. Johnson & David P. Myatt, 2006. "Multiproduct Cournot oligopoly," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 583-601, 09.
  3. Srinagesh, Padmanabhan & Bradburd, Ralph M, 1989. "Quality Distortion by a Discriminating Monopolist," American Economic Review, American Economic Association, vol. 79(1), pages 96-105, March.
  4. Motta, Massimo, 1993. "Endogenous Quality Choice: Price vs. Quantity Competition," Journal of Industrial Economics, Wiley Blackwell, vol. 41(2), pages 113-31, June.
  5. Varian, Hal R, 1985. "Price Discrimination and Social Welfare," American Economic Review, American Economic Association, vol. 75(4), pages 870-75, September.
  6. Besanko, David & Donnenfeld, Shabtai & White, Lawrence J, 1988. "The Multiproduct Firm, Quality Choice, and Regulation," Journal of Industrial Economics, Wiley Blackwell, vol. 36(4), pages 411-29, June.
  7. Armstrong, Mark, 1996. "Multiproduct Nonlinear Pricing," Econometrica, Econometric Society, vol. 64(1), pages 51-75, January.
  8. Raymond J. Deneckere & R. Preston McAfee, 1996. "Damaged Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(2), pages 149-174, 06.
  9. Kim, Jong Seok, 1987. "Optimal Price-Quality Schedules and Sustainability," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 231-44, December.
  10. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
  11. repec:rje:randje:v:37:y:2006:1:p:121-133 is not listed on IDEAS
  12. Jing, Bing, 2007. "Network externalities and market segmentation in a monopoly," Economics Letters, Elsevier, vol. 95(1), pages 7-13, April.
  13. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
  14. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
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