Durable goods monopoly a durable consumer good is a good which provides a stream of sustained consumption services: it can be used more than once Different goods have different degrees of durability Issues of durability introduce 2 complications for a monopolist interested in profit maximizing 1the monopolist creates her own competition The existence of second-hand markets suggests that the market power of the monopolist supplier of the durable good in the future is determined in part by the production of the monopolist today (2) the price consumers would be willing to pay today, and hence demand today, will depend upon their expectations about the price of the good tomorrow If consumers expect that the monopolist will lower prices in the future, they will have an incentive to wait, thereby reducing demand and market power today. The monopolist in the present competes with herself in the future 2 issues the effect of consumer expectations and second-hand markets on the monopoly power of a durable goods monopolist (2 ) the strategies the monopolist can adopt to offset or mitigate these influences on its market power
Durable goods monopoly • A durable consumer good is a good which provides a stream of sustained consumption services: it can be used more than once. • Different goods have different degrees of durability. • Issues of durability introduce 2 complications for a monopolist interested in profit maximizing: • (1) the monopolist creates her own competition. The existence of second-hand markets suggests that the market power of the monopolist supplier of the durable good in the future is determined in part by the production of the monopolist today. • (2) the price consumers would be willing to pay today, and hence demand today, will depend upon their expectations about the price of the good tomorrow. If consumers expect that the monopolist will lower prices in the future, they will have an incentive to wait, thereby reducing demand and market power today. The monopolist in the present competes with herself in the future. • 2 issues: • (1) the effect of consumer expectations and second-hand markets on the monopoly power of a durable goods monopolist; • (2) the strategies the monopolist can adopt to offset or mitigate these influences on its market power
The Coase conjecture(1) Ronald Coase(1972) conjectured that durability and expectations might substantially reduce or eliminate the market power of a monopolist supplier of a durable good Coase's analysis assumes the extreme case of a durable good that lasts forever and is in fixed supply. The assumption that the good lasts forever means that the good does not depreciate and there is 100% recycling- none of the good is lost. Land may be an example of a good that has these 2 characteristics
The Coase conjecture (1) • Ronald Coase (1972) conjectured that durability and expectations might substantially reduce or eliminate the market power of a monopolist supplier of a durable good. • Coase’s analysis assumes the extreme case of a durable good that lasts forever and is in fixed supply. The assumption that the good lasts forever means that the good does not depreciate and there is 100% recycling-none of the good is lost. Land may be an example of a good that has these 2 characteristics
The Coase conjecture(2) Competitive supply S=Q P=P(Q): the willingness of consumers to pay for a lifetime of consumption r=iPc, r is the benefits rental price and i is the common discount rate across consumers Competitive durable goods equilibrium
The Coase conjecture (2) • Competitive supply S=Qc P=P(Q): the willingness of consumers to pay for a lifetime of consumption benefits. Pc Qc Competitive durable goods equilibrium r=iPc , r is the rental price and i is the common discount rate across consumers
The Coase conjecture 3) Monopoly supply Assume that Mc=0 MR(Q1=MC=O MR(Q1) determines the amount pplied Q, in stage 1 and mr2(Q)=MC=0 B determining the amount pplied(Qc-Q1)in the MR2(Q)second stage P=P(Q) E Q Q (1)The first stage consumers can be Durable goods monopol competitive fringe to the second stage monopolist (2)Intertemporal price discrimination
The Coase conjecture (3) • Monopoly supply P1 P2=Pc Q1 Qc P=P(Q) MR(Q1 ) B E MR2 (Q) Assume that MC=0, MR(Q1 )=MC=0 determines the amount supplied Q1 in stage 1 and MR2 (Q)=MC=0 determining the amount supplied (Qc -Q1 ) in the second stage. Durable goods monopoly (1) The first stage consumers can be competitive fringe to the second stage monopolist. (2) Intertemporal price discrimination
The Coase conjecture(4) Strategic consumers The durable goods monopolist has an incentive to lower prices over time. What are the implications for consumer behavior? Consider the consumers who purchased the last unit in period 1. their willingness to pay for this unit equals P, and their surplus on it is zero. If they were to wait one period, surplus of P1-P2 one period in the future this is positive 9 they would be be able to purchase a unit for PC=P2, creating provided prices fall over time -Pi>P2. clearly the marginal consumer has an incentive to delay purchasing if he anticipates that the monopolist will try and lower prices in the future. The cost of waiting for inframarginal consumers is that they do not get any surplus in the first period. The advantage of waiting for inframarginal consumers is similar to that for marginal consumers: surplus is increased due to lower price. Whether waiting is worthwhile for inframarginal consumers depends on the surplus differential and the discount factor
The Coase conjecture (4) • Strategic consumers • The durable goods monopolist has an incentive to lower prices over time. What are the implications for consumer behavior? • Consider the consumers who purchased the last unit in period 1. their willingness to pay for this unit equals P1 and their surplus on it is zero. If they were to wait one period, they would be able to purchase a unit for Pc=P2 , creating surplus of P1 -P2 one period in the future: this is positive provided prices fall over time-P1>P2 . Clearly the marginal consumer has an incentive to delay purchasing if he anticipates that the monopolist will try and lower prices in the future. The cost of waiting for inframarginal consumers is that they do not get any surplus in the first period. The advantage of waiting for inframarginal consumers is similar to that for marginal consumers: surplus is increased due to lower price. Whether waiting is worthwhile for inframarginal consumers depends on the surplus differential and the discount factor