Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model

53 Pages Posted: 11 Sep 2008

See all articles by James J. Anton

James J. Anton

Duke University - Fuqua School of Business; Duke University - Department of Economics; Duke Innovation & Entrepreneurship Initiative

Gary Biglaiser

University of North Carolina

Multiple version iconThere are 2 versions of this paper

Date Written: July 2008

Abstract

We examine an infinite horizon model of quality growth in a durable goods monopoly market. The monopolist generates new quality improvements over time and can sell any available qualities, in any desired bundles, at each point in time. Consumers are identical and for a quality improvement to have value the buyer must possess previous qualities: goods are upgrades. We find that the upgrade structure, quality growth, and the fact that consumers are always in the market can lead to an almost complete loss in market power for the seller even though all consumers are identical. This is true for all discount factors. We show that subgame perfect equilibrium payoffs for the seller range from capturing the full social surplus all the way down to capturing only the current flow value of each good and that each of these payoffs is realized in a Markov perfect equilibrium that follows the socially efficient allocation path. We also find that equilibria may be inefficient.

Keywords: upgrades, durable goods, monopoly, market power

JEL Classification: C73, D42, L12

Suggested Citation

Anton, James J. and Biglaiser, Gary, Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model (July 2008). Economic Research Initiatives at Duke Working Paper No. 9, Available at SSRN: https://ssrn.com/abstract=1265112 or http://dx.doi.org/10.2139/ssrn.1265112

James J. Anton (Contact Author)

Duke University - Fuqua School of Business ( email )

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Duke University - Department of Economics

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Duke Innovation & Entrepreneurship Initiative ( email )

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Gary Biglaiser

University of North Carolina ( email )

Chapel Hill, NC 27599
United States
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919-966-4986 (Fax)

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