z-logo
open-access-imgOpen Access
Dynamic monopoly with relational incentives
Author(s) -
Wolitzky Alexander
Publication year - 2010
Publication title -
theoretical economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.404
H-Index - 32
eISSN - 1555-7561
pISSN - 1933-6837
DOI - 10.3982/te701
Subject(s) - monopoly , incentive , microeconomics , computer science , industrial organization , business , economics
This paper studies the price‐setting problem of a monopoly that in each time period has the option of failing to deliver its good after receiving payment. The monopoly may be induced to deliver the good if consumers expect that the monopoly will not deliver in the future if it does not deliver today. If the good is nondurable and consumers are anonymous, the monopoly's optimal strategy is to set a price equal to the static monopoly price each period if the discount factor is high enough, and otherwise to set the lowest price at which it can credibly promise to deliver the good. If the good is durable, we derive an intuitive lower bound on the monopoly's optimal profit for any discount factor and show that it converges to the optimal static monopoly profit as the discount factor converges to 1, in contrast to the Coase conjecture. We also show that rationing the good is never optimal for the monopoly if there is an efficient resale market and that the best equilibrium in which the monopoly always delivers involves a strictly decreasing price path that asymptotes to a level strictly above the ratio of the monopoly's marginal cost to the discount factor.

The content you want is available to Zendy users.

Already have an account? Click here to sign in.
Having issues? You can contact us here