Uncertain Commitment Power in a Durable Good Monopoly
TILEC Discussion Paper No. 2019-006
CentER Discussion Paper No. 2019-012
21 Pages Posted: 8 May 2019
Date Written: April 17, 2019
Abstract
This paper considers dynamic pricing strategies in a durable good monopoly model with uncertain commitment power to set price paths. The type of the monopolist is private information of the firm and not observable to consumers. If commitment to future prices is not possible, the initial price is high in equilibrium, but the firm falls prey to the Coase conjecture later to capture the residual demand. The relative price cut is increasing in the probability of commitment as buyers anticipate that a steady price is likely and purchase early. Pooling in prices may occur for perpetuity if commitment is sufficiently weak. Polling for infinity is also preserved if committing to a high price is endogenously chosen by the firm.
Keywords: Monopoly; Commitment; Information Asymmetry
JEL Classification: D42, L12, D61, D82
Suggested Citation: Suggested Citation