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Damaged Durable Goods

Jong-Hee Hahn
The RAND Journal of Economics
Vol. 37, No. 1 (Spring, 2006), pp. 121-133
Published by: Wiley on behalf of RAND Corporation
Stable URL: http://www.jstor.org/stable/25046230
Page Count: 13
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Damaged Durable Goods
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Abstract

I analyze a durable-goods monopolist's incentives to introduce a damaged good (a stripped-down version of the original good) in an infinite-horizon framework. The damaged good helps the monopolist to mitigate the Coasian time-inconsistency problem. However, it may lead to a welfare reduction: low-valuation buyers are induced to purchase the low-quality damaged good early rather than buy the high-quality original good later, and when the players are patient the surplus loss from quality reduction outweighs the gain from earlier consumptions. This welfare result contrasts with the previous literature based on a static framework.

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