Perishable Durable Goods

Leonardo Rezende and Inkoo Cho
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Leonardo Rezende: Catholic University Sao Paulo

No 453, 2007 Meeting Papers from Society for Economic Dynamics

Abstract: We examine whether the Coase conjecture (Coase [1972], Stokey [1981], Bulow [1982], Gul, Sonnenschein and Wilson [1986]) is robust against slight ability of commitment of the monopolist not to sell the durable goods to consumers with a reservation value higher than the marginal production cost. We quantify the commitment ability in terms of the speed that the durable goods perish instead of the time interval between the offers. We demonstrate that the slight commitment capability makes a substantial difference by constructing two kinds of reservation price equilibria (Gul, Sonnenschein and Wilson [1986]) that refute the Coase conjecture. In the first equilibrium, the monopolist can credibly delay to make an acceptable offer. Almost all consumers are served, but only after very long delay. As a result, the total gains from trading is arbitrarily small. In the second equilibrium, the monopolist's expected profit can be made close to the static monopoly profit, if the goods perish very slowly. This result differs from (Bond and Samuelson [1984]) where the good is depreciated after being delivered to the consumers, because the difference from the competitive equilibrium outcome does not vanish even if the time between the offers and the rate of decay converge to 0. By using the first kind of reservation price equilibrium as a credible threat against the seller, we can obtain the Folk theorem. Various extensions are discussed.

Date: 2007
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Working Paper: Perishable Durable Goods (2007)
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