Capacity Constraints in Durable Goods Monopoly: Coase and Hotelling

Abstract

We examine the effect of a capacity constraint on the profits of a durable goods monopoly (DGM) in a two-period model when rationing is efficient. For sufficiently high discount factors, output rises through time without a constraint and a constraint increases the DGM profits: it restricts production in the second period, thereby lowering expectations of future prices and the incentive for intertemporal substitution. For lower values of the discount factor, output falls through time without a constraint. Regardless of the discount factor a constraint that binds in both periods may also be profitable. It reduces output in both periods, leading consumers to expect higher prices in the second period and thus increasing market power and prices in the first period.

Keywords: Durable Goods, Coase Conjecture, Capacity Choice, Dynamic Inconsistency

JEL Classification: L1, L12