DP4047 Durable Goods with Quality Differentiation

Author(s): Roman Inderst
Publication Date: September 2003
Keyword(s): coase conjuncture, durable-Goods monopolist, price discrimination, screening
JEL(s): C78, D42, D82
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4047

What is the optimal strategy of a durable-goods monopolist that can offer goods in different qualities? This Paper provides an answer for the case where the market is segmented into low- and high-income buyers. If the monopolist can change their product and price policy sufficiently rapidly - which reduces their commitment power - we find that the whole market is served immediately. Low-quality goods may be sold below costs. These results are strikingly different to those obtained with non-durable goods and to those obtained if the durable good comes only in a single quality. In an extension we further employ our results to discuss how policies of restricted versioning fare differently with non-durable and durable goods.