Durable Goods Pricing When Quality Matters
JOURNAL OF BUSINESS, Vol. 69, No. 4, October 1996
Posted: 3 May 1998
This article considers a durable goods monopolist's choice of price and durability in a setting where durability choice controls the speed with which quality deteriorates. The article derives three main results. First, the price at which old units trade on the secondhand market limits what the firm can charge for new units. Second, because of this linkage between the prices for new and old units, the firm chooses a durability level that is below the socially optimal level. Third, the incentive to reduce durability can be sufficiently severe that the monopolist eliminates the market for secondhand goods.
JEL Classification: L12, L15
Suggested Citation: Suggested Citation