The Time Consistency of Optimal Monetary Policy with Heterogeneous Agents

Stefania Albanesi ()

No 207, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper examines the price and quality choice by a single product risk-neutral monopolist who can delay irreversible investments required for market entry. It is shown that the price and quality she chooses at entry increase with uncertainty about the size of future demand. As opposed to a myopic monopolist she provides a quality that is socially optimal, but the moment at which she invests will be later than socially optimal. In a Stackelberg leader-follower game the leader pre-commits immediately regardless of the level of market uncertainty and may opt for the lower quality good rather than the higher quality good when market uncertainty is high.

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