Prohibiting Prices Below Cost When Product Loyalty Is Endogenous

Thomas J. Holmes

No 292687, SSRI Workshop Series from University of Wisconsin-Madison, Social Systems Research Institute

Abstract: This paper presents a demand-side rationalization for the policy of prohibiting firms from setting prices below marginal cost. A monopoly model is presented in which future demand for the product depends on the level of current investment by consumers in capital which is used in conjunction with the product. The higher the current price, the lower the equilibrium investment in capital and the lower the future equilibrium price. Due to this tradeoff, consumers may benefit from policy intervention to increase the current price. Conditions are found under which the policy of prohibiting prices below cost is welfare improving.

Keywords: Research; Methods/Statistical; Methods (search for similar items in EconPapers)
Pages: 26
Date: 1987-03
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwssri:292687

DOI: 10.22004/ag.econ.292687

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