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Imperfect durability and the Coase conjecture
Author(s) -
Deneckere Raymond,
Liang MengYu
Publication year - 2008
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2008.00001.x
Subject(s) - economics , monopoly , depreciation (economics) , microeconomics , coase theorem , durable good , partial equilibrium , general equilibrium theory , transaction cost , profit (economics) , capital formation , financial capital
This article considers a market served by a monopolist who sells a durable good that depreciates stochastically over time. We show that there exist three types of stationary equilibria: a Coase Conjecture equilibrium, a monopoly equilibrium, and a reputational equilibrium. When the depreciation rate is low, the Coase Conjecture equilibrium is the unique equilibrium. For intermediate values of the depreciation rate, all three equilibrium types coexist. When the depreciation rate is high, the monopoly equilibrium is the unique equilibrium. Consequently, when selling a good of sufficiently low durability, the monopolist does not lose any of her monopoly power. Furthermore, the steady‐state output in the reputational equilibrium falls below the monopoly quantity. Hence, in durable goods markets, welfare losses due to monopoly power may be larger than in markets for perishables.