A Theory of Finitely Durable Goods Monopoly with Used-Goods Market and Transaction Costs

Abstract

We construct a dynamic game to model a monopoly of finitely durable goods. The solution concept is Markov-perfect equilibria with general equilibria embedded in every time period. Our model is flexible enough to simultaneously explain or accommodate many commonly observed phenomena or stylized facts, such as concurrent leasing and selling, active secondary markets for used goods, heterogeneous consumers, endogenous consumption patterns, depreciation, an infinite time horizon, and nontrivial transaction costs. Within our model, consumers have incentives to segment themselves into various consumption classes according to their willingness to pay, and nontrivial transaction costs to sell used goods put strong constraints on consumers' consumption sequences in time. As a direct consequence of the finite durability, the market power of the monopolist remains intact. Leasing manifests itself as a facilitator of price discrimination by debundling the durable good into new and used portions that are naturally bundled together under outright sales. The concurrent leasing and selling reflects the degree of the comparative advantage the monopolist has over consumers in disposing used goods. This comparative advantage, which is partially exploited by the monopolist and partially shared by the consumers, provides a sufficient mechanism to gain Pareto improvement on the market.

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