3.7: The Identification of the Time Inconsistency Problem for Durable Goods Monopolists

3.7 The Identification of the Time Inconsistency Problem for Durable Goods Monopolists

In the early 1980s, Nancy Stokey (1981) and Jeremy Bulow (1982) brought to light a little-known paper published by Ronald Coase ^[10] in 1972 that had devastating consequences for Swan s analysis and conclusion. Previous economists seemed either to have been unaware of Coase s work or not to have understood or trusted its implications until Stokey (1981) formally proved Coase s conjecture ^[11] and Bulow (1982) clarified its implications with respect to product durability and monopoly. ^[12] Coase s paper would occupy economists interested in issues of durability for the rest of the 1980s and form the basis for many other works on the subject in the 1990s.

What was Coase s conjecture? How is it relevant to the problem of durability choice, and what implications does it carry for Swan s analysis and result?

Coase (1972) introduced what later came to be called the time inconsistency problem of a durable goods monopolist. In this problem, he integrated two separate considerations with respect to the analysis of durability and monopoly, namely pricing dynamics and consumer rational expectations:

1. Pricing dynamics: On one hand, there is the pricing dynamics of a monopolist selling durable goods and attempting to price discriminate over time between consumers with different valuations of the product. Consider the following hypothetical sequence of events: the monopolist first sells the good at the monopoly price to consumers with a high valuation of the product.