Quality, Upgrades, and Equilibrium in a Dynamic Monopoly Model

48 Pages Posted: 14 Apr 2010 Last revised: 21 Sep 2012

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

Date Written: March 12, 2012

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 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. This is true for all discount factors. We also show that inefficient equilibria exist for rates of innovation above a threshold.

Suggested Citation

Anton, James J. and Biglaiser, Gary, Quality, Upgrades, and Equilibrium in a Dynamic Monopoly Model (March 12, 2012). Economic Research Initiatives at Duke (ERID) Working Paper No. 37, Available at SSRN: https://ssrn.com/abstract=1589748 or http://dx.doi.org/10.2139/ssrn.1589748

James J. Anton (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0097
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919-660-7754 (Phone)
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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
919-966-4884 (Phone)
919-966-4986 (Fax)

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