Intertemporal Quality Discrimination

New technology is usually expensive and it takes time for manufacturers to make the technology more accessible. In the stereo industry, the first Super Audio Compact Disk (SACD) player made by Sony, SCD-1, sold for $5,000 in 1999; in 2002 the cheapest of Sony's new SACD players, SCD-CE775, had a $250 MSRP, while the SCD-1 continued to be Sony's flagship model. The electrostatic speaker manufacturer MartinLogan developed a technology trademarked ClearSpars for their Statement e2 speakers, which came to the market in 2000 with a list price of $80,000 per pair. MartinLogan later applied the technology to their mid-price ($3300 per pair) Aeon i in 2003. The amplifier manufacturer Conrad-Johnson introduced in 2000 its current top pre-amplifier, ART Series 2, and in 2003 added to their product line a stripped-down version of the ART, the Premier 17LS, whose price is less than one-third the price of the ART. The four-wheel-drive vehicle manufacturer Land Rover introduced their mid-price model Discovery in 1986, after they remodeled their luxury line Range Rover in the early 80s. In these examples, before the firms could scale down their new technologies for the mass markets, they sold only the high-end products; and after the more affordable low-end products became available, they sold both kinds of products. Furthermore, these products are durable goods, and so by the time the firms introduced the low-end products, the consumers who had bought the high-end products were no longer in the market. In this paper we abstract from the inter-firm competition. That is, we assume that the durable goods market is monopoly, and study the quality decision and the pricing of the durable goods monopolist whose first-generation product has higher quality than the second-generation one, which is not available at the time the first-generation product is first introduced to the market. In addition to Coasian dynamics, or intertemporal price discrimination, the issue involves intertemporal quality discrimination. Our analysis focuses on whether the monopolist would produce goods with qualities higher than the optimum. In static quality (or quantity) discrimination models, where a monopolist can use several quality-price packages to screen consumers, it is well known that a monopolist would discriminate the consumers by offering the efficient quality only to the consumer with the highest valuation, and offering everyone else a quality less than the optimum. In no circumstances could the consumers get above-optimum quality in the static model. [See Mussa and Rosen (1978) and Maskin and Riley (1984).] However, in our model of intertemporal quality discrimination, we find that the monopolist will produce goods of above-optimum quality in its product line when the discount factor is small.