Durable-Goods Monopolists, Rational Consumers, and Improving Products

Anirudh Dhebar
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Anirudh Dhebar: Harvard Business School

Marketing Science, 1994, vol. 13, issue 1, 100-120

Abstract: We consider the case of a monopolist supplying an improving durable product to a population that is heterogeneous in its valuation of product quality. In a two-period framework, we show that if consumers expect the product to improve in “present-value” terms, then intertemporal discrimination might result in the first-period marginal consumer being left with zero surplus and some higher-end consumers postponing purchase. The resulting trajectories for quality and price do not constitute a subgame-perfect equilibrium. One of our conclusions is that the logic of profit maximization in the context of rational consumer choice imposes a demand-side constraint on the rate of product improvement. We also emphasize the disequilibrium consequences of improving a product so rapidly that high-end consumers are tempted to wait for a future new-and-improved version. Finally, the formulation adopted in the paper may be useful to understand observed differences in product improvement rates in different markets.

Keywords: product policy; product improvement; pricing research; Game theory (search for similar items in EconPapers)
Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:13:y:1994:i:1:p:100-120

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