How to Commit to a Future Price

Keisuke Hattori and Amihai Glazer

No 131402, Working Papers from University of California-Irvine, Department of Economics

Abstract: Consider a monopolist which sells a durable good and also consumables that require use of the durable good. After the firm sells the durable good, it has an incentive to charge a price greater than marginal cost for the consumables. Realizing that they will have to pay a high price for consumables, consumers would be willing to pay only a low price for the durable good, reducing the firm's profits. The paper considers three mechanisms which would induce the firm to charge a low price for the consumables. First, it can enter into a financial contract paying a lump-sum fee in return for a per-unit subsidy for the selling the consumable. Second, the seller can allow entry into the market for the consumable. Third, the firm may sell the durable good at a low price to consumers who little value the durable and consumable, so that it will have an incentive to later set a low price for the consumable.

Keywords: Pricing commitment; Durable goods (search for similar items in EconPapers)
JEL-codes: L14 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2013-07
New Economics Papers: this item is included in nep-com
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