Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model

James Anton () and Gary Biglaiser

No 10-13, Working Papers from Duke University, Department of Economics

Abstract: We examine an infinite horizon model of quality growth in a durable goods monopoly market. The monopolist generates new quality improvements over time and can sell any available qualities, in any desired bundles, at each point in time. Consumers are identical and for a quality improvement to have value the buyer must possess previous qualities--goods are upgrades. We find that the upgrade structure, quality growth, and the fact that consumers are always in the market can lead to an almost complete loss in market power for the seller even though all consumers are identical. This is true for all discount factors. We show that subgame perfect equilibrium payoffs for the seller range from capturing the full social surplus all the way down to capturing only the current flow value of each good and that each of these payoffs is realized in a Markov perfect equilibrium that follows the socially efficient allocation path. We also find that equilibria may be inefficient.

Keywords: upgrades; durable goods; monopoly; market power (search for similar items in EconPapers)
JEL-codes: C73 D42 L12 (search for similar items in EconPapers)
Pages: 53
Date: 2010
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Related works:
Working Paper: Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model (2009)
Working Paper: Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model (2008)
Working Paper: Quality Upgrades and the (loss) of Market Power in a Dynamic Monopoly Model (2007)
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