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Durable-Goods Monopoly with Discrete Demand

Mark Bagnoli, Stephen W. Salant and Joseph E. Swierzbinski
Journal of Political Economy
Vol. 97, No. 6 (Dec., 1989), pp. 1459-1478
Stable URL: http://www.jstor.org/stable/1833248
Page Count: 20
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Durable-Goods Monopoly with Discrete Demand
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Abstract

We analyze a dynamic game between consumers and the sole seller of a durable good. Unlike previous analyses, we assume that there exists a finite collection of buyers rather than a continuum. None of the main conclusions of the literature on durable-goods monopoly survives this change in assumption. Coase's conjecture that a durable-goods monopolist cannot earn supracompetitive profits in the continuous-time limit, Bulow's proposition that renting a durable is always more profitable than selling it, and Stokey's proposition that precommitting to a time path of prices is always optimal are all false when the set of buyers is finite. Thus the assumption of a continuum of consumers--so innocuous and useful a simplification in other contexts--has proved misleading in the context of durable-goods monopoly.

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