IDEAS home Printed from https://ideas.repec.org/p/smu/ecowpa/707.html
   My bibliography  Save this paper

Quality Uncertainty and Time Inconsistency in a Durable Good Market

Author

Listed:
  • Evrim Dener

    (SMU)

Abstract

In a durable good monopoly where consumers cannot observe quality prior to purchase and product improvement occurs exogenously over time, we show that uncertainty in quality may resolve the time inconsistency problem (even for low levels of product improvement). Higher dispersion in quality creates greater demand for future product by increasing the incentive of buyers with inferior quality realizations to repurchase and this, in turn, reduces the incentive of the seller to cut future price. For various levels of product improvement, we characterize the range of quality uncertainty for which the market equilibrium is identical to one where the monopolist can credibly precommit to future prices. We also show that the presence of quality uncertainty can lead to no trading in the primary good market.

Suggested Citation

  • Evrim Dener, 2007. "Quality Uncertainty and Time Inconsistency in a Durable Good Market," Departmental Working Papers 0707, Southern Methodist University, Department of Economics.
    • Handle: RePEc:smu:ecowpa:707
    as

    Download full text from publisher

    File URL: https://ftp1.economics.smu.edu/WorkingPapers/2007/Dener/Dener.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Daniel A. Levinthal & Devavrat Purohit, 1989. "Durable Goods and Product Obsolescence," Marketing Science, INFORMS, vol. 8(1), pages 35-56.
    2. Jae Nahm, 2004. "Durable‐Goods Monopoly with Endogenous Innovation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 303-319, June.
    3. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, vol. 89(5), pages 1097-1115, December.
    4. Eric W. Bond & Larry Samuelson, 1984. "Durable Good Monopolies with Rational Expectations and Replacement Sales," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 336-345, Autumn.
    5. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    6. Michael Waldman, 1996. "Planned Obsolescence and the R&D Decision," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 583-595, Autumn.
    7. Drew Fudenberg & Jean Tirole, 1998. "Upgrades, Tradeins, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 235-258, Summer.
    8. Jeremy Bulow, 1986. "An Economic Theory of Planned Obsolescence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 729-749.
    9. Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 61-92, April.
    10. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Evrim Dener, 2011. "Quality uncertainty and time inconsistency in a durable good market," Journal of Economics, Springer, vol. 104(1), pages 1-24, September.
    2. Michael Waldman, 2004. "Antitrust Perspectives for Durable-Goods Markets," CESifo Working Paper Series 1306, CESifo.
    3. Eric Brouillat, 2011. "Durability of consumption goods and market competition: an agent-based modelling," Post-Print hal-00780254, HAL.
    4. William Caylor, 2016. "Credible Signals Of The Release Of New Versions," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 862-878, April.
    5. Utaka, Atsuo, 2008. "Pricing strategy, quality signaling, and entry deterrence," International Journal of Industrial Organization, Elsevier, vol. 26(4), pages 878-888, July.
    6. Robert H. Porter & Peter Sattler, 1999. "Patterns of Trade in the Market for Used Durables: Theory and Evidence," NBER Working Papers 7149, National Bureau of Economic Research, Inc.
    7. Galiani, Sebastian & Jaitman, Laura & Weinschelbaum, Federico, 2020. "Crime and durable goods," Journal of Economic Behavior & Organization, Elsevier, vol. 173(C), pages 146-163.
    8. Pasquale Schiraldi, 2006. "Second-Hand Markets and Collusion by Manufacturers of Semidurable Goods," Boston University - Department of Economics - Working Papers Series WP2006-028, Boston University - Department of Economics.
    9. Gerstle, Ari D. & Waldman, Michael, 2016. "Mergers in durable-goods industries: A re-examination of market power and welfare effects," Research in Economics, Elsevier, vol. 70(4), pages 677-692.
    10. Anton, James J. & Biglaiser, Gary, 2013. "Quality, upgrades and equilibrium in a dynamic monopoly market," Journal of Economic Theory, Elsevier, vol. 148(3), pages 1179-1212.
    11. Qiu_Hong Wang & Kai-Lung Hui, 2005. "Technology Timing and Pricing In the Presence of an Installed Base," Industrial Organization 0512013, University Library of Munich, Germany.
    12. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    13. Eric Brouillat, 2015. "Live fast, die young? Investigating product life spans and obsolescence in an agent-based model," Journal of Evolutionary Economics, Springer, vol. 25(2), pages 447-473, April.
    14. Atsuo Utaka, 2015. "High Price Strategy and Quality Signalling," The Japanese Economic Review, Japanese Economic Association, vol. 66(3), pages 408-420, September.
    15. Cerquera Dussán, Daniel, 2007. "Durable Goods, Innovation and Network Externalities," ZEW Discussion Papers 07-086, ZEW - Leibniz Centre for European Economic Research.
    16. Judith Chevalier & Austan Goolsbee, 2009. "Are Durable Goods Consumers Forward-Looking? Evidence from College Textbooks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1853-1884.
    17. Edward Kutsoati & Jan Zabojnik, 2001. "Durable Goods Monopoly, Learning-by-doing and "Sleeping Patents"," Discussion Papers Series, Department of Economics, Tufts University 0105, Department of Economics, Tufts University.
    18. Sylvain Prado, 2010. "A Family Hitch: Econometrics of the New and the Used Car Markets," Working Papers hal-04140927, HAL.
    19. Kuppelwieser, Volker G. & Klaus, Phil & Manthiou, Aikaterini & Boujena, Othman, 2019. "Consumer responses to planned obsolescence," Journal of Retailing and Consumer Services, Elsevier, vol. 47(C), pages 157-165.
    20. Francesco Nava & Pasquale Schiraldi, 2019. "Differentiated Durable Goods Monopoly: A Robust Coase Conjecture," American Economic Review, American Economic Association, vol. 109(5), pages 1930-1968, May.

    More about this item

    Keywords

    durable goods; dynamic inconsistency; quality uncertainty;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:smu:ecowpa:707. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ömer Özak (email available below). General contact details of provider: http://www.smu.edu/economics .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.