Uncertain Commitment Power in a Durable Good Monopoly

Abstract

This paper considers dynamic pricing strategies in a durable good monopoly model with uncertain commitment power to set price paths. The type of the monopolist is private information of the firm and not observable to consumers. If commitment to future prices is not possible, the initial price is high in equilibrium, but the firm falls prey to the Coase conjecture later to capture the residual demand. The relative price cut is increasing in the probability of commitment as buyers anticipate that a steady price is likely and purchase early. Pooling in prices may occur for perpetuity if commitment is sufficiently weak. Polling for infinity is also preserved if committing to a high price is endogenously chosen by the firm.

Keywords: Monopoly; Commitment; Information Asymmetry

JEL Classification: D42, L12, D61, D82