Optimal priority pricing by a durable goods monopolist (Q2049483): Difference between revisions

The inability to commit to future prices reduces a monopolist's market power when selling durable items over time with posted prices and hence, in the absence of price discrimination. The buyers who are most willing to trade at any given time are those who have the highest valuations for the durable good. As a result, the seller will face buyers with lower valuations in the future and will have an incentive to lower the price. For this reason, buyers become reluctant to pay a price that is significantly greater than the price they expect to be charged in the future. But, in the presence of price discrimination, rationing becomes relevant. Rationed buyers suffer a ratchet effect because their relatively high valuations for the durable good are revealed. Yet, buyers are willing to risk being rationed because rationed buyers remain pooled with buyers with lower valuations who did not wish to trade. It has been demonstrated that trade under such circumstances may be more profitable but never less profitable than trade in the absence of price discrimination, because the seller may increase profit through rationing only if trade is based on price discrimination. This paper investigates the optimal selling mechanism in a two-period price-discriminating (or ``opaque'' as termed by the authors) environment. It is shown that the optimal selling mechanism in the first period may be either a relatively high posted price, a relatively low price with rationing, or a priority pricing menu composed by a relatively high price guaranteeing delivery and a relatively low price subject to rationing. More complicated mechanisms do not increase the seller's revenue.