Tuesday, October 4, 2011
Posted by D. Daniel Sokol
Eric Bennett Rasmusen, Indiana University Bloomington - Department of Business Economics & Public Policy
explains Monopoly versus Competitive Leveraging of Reputation through Umbrella Pricing
. ABSTRACT: The Klein-Leffler model explains how the benefit of future reputation can induce firms to produce high quality experience goods, either in a monopoly or an industry with competing firms. We show that reputation can be leveraged across products, but only by a firm with a monopoly on at least one product. Such a firm, however, may be able to capture the market for a competitive product by using umbrella pricing to make higher quality more credible than for firms without a monopoly base. Such monopoly extension increases social welfare, and can even benefit consumers, despite the increase in price. The expanding monopolist does not need to use bundling, and consumers are left better off, but otherwise this looks like classic monopoly leverage.