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Habits, Market Power, and Policy Selection

Author

Listed:
  • Luca Bossi

    (Department of Economics, University of Miami)

  • Vladimir Petkov

    (School of Economics and Finance, Victoria University of Wellington)

Abstract

This paper examines monopolistic behavior in a framework with habit formation and consumer commitment. We show that time consistent output and pricing policies yield di®erent market outcomes. Policy selection determines the strategic properties of the producer's intra-personal game: current and future quantities are strategic com- plements, while current and future prices are strategic substitutes. In both a simple two-period model and an in¯nite-horizon model, we ¯nd that pricing policies allow the monopolist to attain higher equilibrium pro¯ts.

Suggested Citation

  • Luca Bossi & Vladimir Petkov, 2007. "Habits, Market Power, and Policy Selection," Working Papers 0702, University of Miami, Department of Economics.
    • Handle: RePEc:mia:wpaper:0702
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    References listed on IDEAS

    as
    1. Driskill, Robert & McCafferty, Stephen, 2001. "Monopoly and Oligopoly Provision of Addictive Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 43-72, February.
    2. Karp, Larry, 1996. "Monopoly Power Can Be Disadvantageous in the Extraction of a Durable Nonrenewable Resource," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 825-849, November.
    3. Matthew Rabin & Ted O'Donoghue, 1999. "Doing It Now or Later," American Economic Review, American Economic Association, vol. 89(1), pages 103-124, March.
    4. Roland Benabou & Jean Tirole, 2004. "Willpower and Personal Rules," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 848-886, August.
    5. George Messinis, 1999. "Habit Formation and the Theory of Addiction," Journal of Economic Surveys, Wiley Blackwell, vol. 13(4), pages 417-442, September.
    6. Becker, Gary S & Grossman, Michael & Murphy, Kevin M, 1994. "An Empirical Analysis of Cigarette Addiction," American Economic Review, American Economic Association, vol. 84(3), pages 396-418, June.
    7. Igal Hendel & Paolo Dudine & Alessandro Lizzeri, 2006. "Storable Good Monopoly: The Role of Commitment," American Economic Review, American Economic Association, vol. 96(5), pages 1706-1719, December.
    8. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    9. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
    10. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-763, Part I Ju.
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    Cited by:

    1. Luca Bossi & Pedro Gomis-Porqueras & David L. Kelly, 2007. "Optimal Second Best Taxation of Addictive Goods," Working Papers 0708, University of Miami, Department of Economics.
    2. Luca Bossi, 2007. "Per Unit Versus As Valorem Taxes Under Dynamic Monopoly," Working Papers 0703, University of Miami, Department of Economics.

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    More about this item

    Keywords

    Habit persistence; monopoly; time consistency;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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