1. Durable Goods Monopoly

2. the optimal monopoly price and the welfare loss of monopoly pricing change for a durable goods monopolist. 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.

3. complications Issues of durability introduce two complications for a monopolist interested in profit maximizing. a.the monopolist creates her own competition. b.expectations about the price of the good tomorrow.

4. The Coase Conjecture Ronald Coase (1972) conjectured that durability and expectations might substantially reduce or eliminate the market power of a monopolist supplier of a durable good.

5. Competitive Supply

6. To begin, we first find the competitive solution. Figure 4.3 shows the equilibrium price and quantity in the market when supply is competitive. Since supply is fixed and marginal cost is zero, the supply curve is vertical. The competitive price is Pc. The demand curve in Figure 4.3 is the willingness of consumers to pay for a lifetime of consumption benefits. If we assume (for simplicity) that everyone lives forever and the population does not change, then the equilibrium in Figure 4.3 will prevail every period.

7. Monopoly Supply

8. The durable good monopolist has an incentive to practice intertemporal price discrimination: she could increase her profits by decreasing prices over time. Initially, the monopolist only supplies those consumers with a high willingness to pay. Over time, the monopolist maximizes profits by moving down the demand curve, gradually lowering prices, until price falls to the competitive price and her supply is exhausted.

9.  marginal revenue in the second period for the first unit of supply by the monopolist does not equal marginal cost. It equals the first-period price P1. This gives the monopolist an incentive to supply more, moving down MR2(Q).  The durable good monopolist has an incentive to practice intertemporal price discrimination: she could increase her profits by decreasing prices over time.  Initially, the monopolist only supplies those consumers with a high willingness to pay. Over time, the monopolist maximizes profits by moving down the demand curve, gradually lowering prices, until price falls to the competitive price and her supply is exhausted. A durable goods monopolist has no monopoly power if the time between price adjustments is vanishingly small

10. Strategies to Mitigate the Coase Conjecture Leasing Reputation Contractual Commitments Limit Capacity Production Takes Time New Customers Planned Obsolescence.

11. Pacman Economics An alternative hypothesis is that in the limit as the discount factor goes to one the market power of the monopolist becomes perfect—she is able to extract all the surplus of consumers. In the twinkling of an eye the price falls to the competitive price, but in the twinkle the monopolist makes sales at the reservation prices of consumers. Unlike the analysis of Coase, the monopolist does make sales before the competitive price is reached.

12. The monopolist sets her price at period t equal to the highest reservation price of any consumer that has not purchased prior to t. This is called the Pacman strategy, since it specifies that the monopolist will move down the demand curve selling to consumers sequentially in order of their reservation prices. Consumers elect to buy as soon as the price is less than or equal to their reservation prices. Consumer i buys in period t if vi ≥ pt. This is called the “get-it-while-you- can” strategy. As soon as consumers are able to realize non-negative surplus they buy. If the monopolist is playing the Pacman strategy, it is not possible for a consumer to do better.

13. Coase vs. Pacman Coase If the set of buyers is continuous and they are sufficiently patient, then the result is the elimination of market power and competitive pricing. Pacman If buyers are finite then for a sufficiently patient monopolist, the result is maximum market power and perfect intertemporal price discrimination.

14. Recycling If there is depreciation (not all of primary production is recoverable) and/or shrinkage (some of the recovered scrap is lost in the production of secondary product), then if the monopolist stopped producing, eventually secondary production of the product would disappear. On the other hand, if there is no depreciation and no shrinkage, then eventually the market power of the primary producer is eliminated

15. THANKS