Intertemporal Price-Quality Discrimination and the Coase Conjecture

Abstract

We examine time-consistent intertemporal price and quality discrimination by a durable goods monopolist facing a continuum of rational buyers with heterogeneous preferences over product quality. We focus the analysis on the "gap" case, where it is profitable for the monopolist to trade with the marginal buyer in the market. We show that along every subgame perfect equilibrium path, with probability one, prices and qualities decline over time, and the market is completely and monotonically depleted according the buyers' demand-intensity for quality in a finite number of offers. However, unlike the fixed quality literature, the monopolist may randomize over price-quality offers along the equilibrium path. We also show that the Coase conjecture continues to be valid here, but in a form that is significantly different from the usual formulation. In the limit, as the time between offers evaporates, the monopolist makes a continuum of offers and perfectly screens the market. However, he effectively can not price-discriminate, since the equilibrium profits are the complete "pooling" profits that would be made if the entire market had the marginal buyer's valuation.

Keywords: Durable goods monopoly, Quality discrimination, Coase conjecture

JEL Classification: D40, D42, C72