Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Tuesday, March 24, 2009

Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model

Posted by D. Daniel Sokol

James J. Anton (Duke University - Fuqua Business) and Gary Biglaiser (UNC Chapel Hill - Economics) have written on Quality, Upgrades, and (the Loss of) Market Power in a Dynamic Monopoly Model.

ABSTRACT: We examine an in…nite horizon model of quality growth in a durable goods monopoly market. The monopolist generates new quality improvements over time and can sell any available qualities, in any desired bundles, at each point in time. Consumers are identical and for a quality improvement to have value the buyer must possess previous qualities: goods are upgrades. We …nd that the upgrade structure, quality growth, and the fact that consumers are always in the market can lead to an almost complete loss in market power for the seller even though all consumers are identical. This is true for all discount factors. We show that subgame perfect equilibrium payo¤s for the seller range from capturing the full social surplus all the way down to capturing only the current show value of each good and that each of these payo¤s is realized in a Markov perfect equilibrium that follows the socially efficient allocation path. We also …find that equilibria may be inefficient.

http://lawprofessors.typepad.com/antitrustprof_blog/2009/03/quality-upgrade.html

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