James J. Anton and Gary Biglaiser
Journal of Economic Theory, Vol. 148, pp. 1179-1212
Abstract: We examine an infinite horizon model of quality growth for a durable goods monopoly. Quality improvements may be sold in any desired bundles. Consumers are identical and for a quality improvement to have value the buyer must possess previous qualities: goods are upgrades. Subgame perfect seller payoffs range from capturing the full social surplus down to only the initial flow value of each good, as long as the value of all future quality growth exceeds the value of a single unit. Each of these payoffs is realized in a Markov perfect equilibrium that follows the socially efficient path. However, inefficient delay equilibria, with bundling, exist for innovation rates above a threshold.
JEL: C72, C73, D42, L15
Keywords: Upgrades, durable goods, monopoly, market power, coordination