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T-Space at The University of Toronto Libraries >
Theoretical Economics >
Volume 5, Number 3 (September 2010) >

Please use this identifier to cite or link to this item: http://hdl.handle.net/1807/27193

Title: Dynamic monopoly with relational incentives
Authors: Alexander Wolitzky; Department of Economics, Massachusetts Institute of Technology
Keywords: Coase conjecture, durable goods, monopoly pricing, non-durable goods, rationing, relational incentives
C70, D42, L12
Issue Date: 22-Sep-2010
Publisher: Theoretical Economics
Citation: Theoretical Economics; Vol 5, No 3 (2010)
Abstract: [This item is a preserved copy. To view the original, visit http://econtheory.org/] This paper studies the price-setting problem of a monopoly that in each time period has the option of failing to deliver its good after receiving payment. The monopoly may be induced to deliver the good if consumers expect that the monopoly will not deliver in the future if it does not deliver today. If the good is non-durable and consumers are anonymous, the monopoly's optimal strategy is to set price equal to the static monopoly price each period if the discount factor is high enough, and otherwise to set the lowest price at which it can credibly promise to deliver the good. If the good is durable, we derive an intuitive lower bound on the monopoly's optimal profit for any discount factor and show that it converges to the optimal static monopoly profit as the discount factor converges to one, in contrast to the Coase conjecture. We also show that rationing the good is never optimal for the monopoly if there is an efficient resale market and that the best equilibrium in which the monopoly always delivers involves a strictly decreasing price path that asymptotes to a level weakly above the ratio of the monopoly's marginal cost to the discount factor.
URI: http://hdl.handle.net/1807/27193
Other Identifiers: http://econtheory.org/ojs/index.php/te/article/view/20100479
Rights: Authors who publish in <i>Theoretical Economics</i> will release their articles under the <a href="http://creativecommons.org/licenses/by-nc/2.5/">Creative Commons Attribution-NonCommercial license</a>. This license allows anyone to copy and distribute the article for non-commercial purposes provided that appropriate attribution is given.
Appears in Collections:Volume 5, Number 3 (September 2010)

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