Quality Uncertainty and Time Inconsistency in a Durable Good Market

Evrim Dener ()
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Evrim Dener: SMU

No 707, Departmental Working Papers from Southern Methodist University, Department of Economics

Abstract: In a durable good monopoly where consumers cannot observe quality prior to purchase and product improvement occurs exogenously over time, we show that uncertainty in quality may resolve the time inconsistency problem (even for low levels of product improvement). Higher dispersion in quality creates greater demand for future product by increasing the incentive of buyers with inferior quality realizations to repurchase and this, in turn, reduces the incentive of the seller to cut future price. For various levels of product improvement, we characterize the range of quality uncertainty for which the market equilibrium is identical to one where the monopolist can credibly precommit to future prices. We also show that the presence of quality uncertainty can lead to no trading in the primary good market.

Keywords: durable goods; dynamic inconsistency; quality uncertainty (search for similar items in EconPapers)
JEL-codes: L15 L12 D42 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-mic
Date: Written 2007-09
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