L4: Durable Goods Monopoly

Question 1

durable goods

Answer 1

goods you can keep using throughout time and you can sell/delay purchases

offer a stream of services

Question 2

durable goods monopolist

Answer 2

monopolist produces durable good

monopolist can set different prices over time, intertemporal price discrimination

continuum of consumers with different WTP
- if monopolist sells a lot today, it reduces demand for good tomorrow
- if demand is lower tomorrow, monopolist has incentive to reduce price tomorrow

monopolist does not lose on inframarginal consumers from earlier periods
- start by selling highest WTP where people really want it and buy it
- charging a slightly lower price so you don’t lose on inframarginal costs the next day since people who have high WTP above price have already bought the good

consumers realise this and are willing to wait to pay lower price

monopolist competes with tomorrow’s self
- single participating implicitly competing with itself because of intertemporal substitution

Question 3

Coase conjecture

Answer 3

ability to charge different prices over time hurts the monopolist

when the future matters more for consumers, monopolist loses market power
- when consumers are patient and can wait more, monopolist loses market power
- the more impatient consumers are and the les s they value the future, the more market power the monopolist has

in the limit, outcome is competitive equilibrium where consumers only care about the present
- back to standard monopolist

implications:
- monopoly profit is lower when intertemporal price discrimination can occur
- monopolist is better off if they can commit to a single price over time

Question 4

durable goods under perfect competition

Answer 4

in the first period, monopolist sells q1 at p1 and withholds units for second period

in the second period, no consumer buys at p1 but all are willing to pay more than MC
- first period buyers will not resell in period 2 sine p2 < p1

firm has incentive to sell and set p2 = c to increase profits
- once all goods are sold at p1, new demand curve so the monopolist sells at a new MC=MR

every subsequent period, the firm supplies more of the good at a lower price
- occurs until the good is completely sold

cost of consumers waiting is not having the good, but the benefit is having lower price

Question 5

pricing with commitment

Answer 5

monopolist commits to setting the same price in both periods

consumer will always buy in the first period and not the second since the price is the same
- rather have the good today and use it for the full period rather than buying tomorrow

if quantity sold is q1, marginal consumer values it in 1-q1

Question 6

why does price increase with the discount factor?

Answer 6

prices and profits increase with the discount factor

if consumers value tomorrow more, they are willing to pay more today since they know they can use the good in both periods

Question 7

is commitment credible?

Answer 7

once the monopolist sets prices and sells, in the second period when no one is buying, it exposes that the monopolist would be better off by decreasing the price

however, price is only optimal in the first period if they commit

consumers know that monopolists cannot credibly commit

Question 8

pricing without commitment

Answer 8

working backwards
- want to find the optimal q2 given q1

finding the marginal consumer who is indifferent between buying in t=1 or t=2

firm knows that in the first period, the monopolist gets p1q1 but in the second period, there’s the discount factor with the profits of the second period

Question 9

commitment vs. non-commitment

Answer 9

if monopolist can commit, they can charge higher prices in the first period and get more profit overall
- prices are higher since you’re not competing against yourself tomorrow

Question 10

leasing

Answer 10

implies setting period-specific prices

monopolist can lease the good instead of selling it, and charge a rental price in both periods

solves the issue of commitment and no commitment
- breaks the dynamic relationship between today and tomorrow

Question 11

leasing as a solution to Coase

Answer 11

in each period, maximising the static problem

with leasing, the monopolist can get away from the problem and charge optimal price
- outcome is the same as under intertemporal discrimination with commitment

monopolist has no incentive to decrease prices in the future since consumers are only renting the good so rental price is the same in every period
- consumers have no incentive to wait since they never own the good

solution for the monopolist that cannot commit to recover the solution with commitment

Question 12

how to mitigate the Coast conjecture?

Answer 12

leasing
- concern that rentals reduce maintenance/quality

contracts
- allow the firm to credibly commit

limit capacity
- allows the firm to commit to not producing more so they cannot decrease prices in the second period

planned obsolescence
- reduces durability
- seller is better off as they can keep selling and it moves away from the durable goods problem

Question 13

Are Durable Goods Consumers Forward-Looking? Chevalier and Goolsbee, 2009

Answer 13

looking at the resale market of college textbooks and how this affects WTP

how does a resale market affect WTP?
- rational view: thinking of it as a rental so WTP is higher
- behavioural view: ignoring resale market, WTP is lower since you don’t account for the second period

findings that suggest consumers internalise resale outcome and are not fully myopic
- discount factor doesn’t seem to be 0 since if it was, they wouldn’t be thinking about the resale market

implications:
- intertemporal links matter for durable goods markets
- when consumers are rational, revision frequency is less relevant since consumers adjust WTP