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Damaged Durable Goods, Upgrades, and the Coase Conjecture

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This study analyzes a damaged-goods market for a perfectly durable good in an infinite-horizon, discrete-time game. We characterize Markov perfect equilibria of this game under different buyer upgrade possibilities as a function of the common discount factor, the length of the time period between successive price changes, and the quality levels of the goods. We establish that introducing a lower-quality good (or equivalently, damaging a good) works as a commitment device only if consumers holding a durable good cannot reenter the market. When a buyer can upgrade the product, we establish that for all parameter values the Coase conjecture survives. (JEL: C73, L12)
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Keywords: damaged goods; durable goods; monopoly; pricing; upgrades

Appeared or available online: February 2, 2018

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