Durable Goods, Coasian Dynamics, and Uncertainty: Theory and Experiments

Posted: 16 Nov 2001

See all articles by Timothy N. Cason

Timothy N. Cason

Purdue University - Krannert School of Management

Tridib Sharma

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica

Abstract

This paper presents a model in which a durable goods monopolist sells a product to two buyers. Each buyer is privately informed about his own valuation. Thus all players are imperfectly informed about market demand. We study the monopolist's pricing behavior as players' uncertainty regarding demand vanishes in the limit. In the limit, players are perfectly informed about the downward-sloping demand. We show that in all games belonging to a fixed and open neighborhood of the limit game there exists a generically unique equilibrium outcome that exhibits Coasian dynamics and in which play lasts for at most two periods. A laboratory experiment shows that, consistent with our theory, outcomes in the Certain and Uncertain Demand treatments are the same. Median opening prices in both treatments are roughly at the level predicted and considerably below the monopoly price. Consistent with Coasian dynamics, these prices are lower for higher discount factors. Demand withholding, however, leads to more trading periods than predicted.

Suggested Citation

Cason, Timothy N. and Sharma, Tridib, Durable Goods, Coasian Dynamics, and Uncertainty: Theory and Experiments. Journal of Political Economy, Vol. 109, December 2001. Available at SSRN: https://ssrn.com/abstract=289204

Timothy N. Cason (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States
765-494-1737 (Phone)

Tridib Sharma

Instituto Tecnológico Autónomo de México (ITAM) - Centro de Investigacion Economica ( email )

Av. Camino a Santa Teresa #930
Col. Heroes de Padierna
Mexico City, D.F. 10370
Mexico D.F.
+525 6284197 (Phone)
+525 6284058 (Fax)

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