Econometrica: Mar, 1986, Volume 54, Issue 2

The Durable Goods Monopolist and Consistency with Increasing Costs

https://doi.org/0012-9682(198603)54:2<275:TDGMAC>2.0.CO;2-P
p. 275-294

Charles Kahn

This paper derives the equilibrium behavior of a monopoly producer of a durable good in a continuous time framework. We show that if purchasers are subject to rational expectations then a monopolist who cannot precommit to a particular production strategy produces more at every instant of time than does a monopolist who can precommit. Asymptotically the total production of a monopolist who cannot precommit is equal to the welfare maximizing producer's; however the monopolist produces more slowly, as long as firms are subject to increasing marginal costs. Thus we formally demonstrate that the original Coase intuition regarding the efficiency of the monopoly producer of a durable good only holds in the case of constant marginal costs.