Trickle-Down Technology and Screening of a Durable Goods Monopolist

Authors

  • Su-Chen Huang Overseas Chinese University
  • Shih-Ti Yu National Tsing Hua University
  • Woody Chih-Yi Chi National Chung Hsing University
  • Wen-Ben Yang National Chung Hsing University

DOI:

https://doi.org/10.6000/1929-7092.2015.04.06

Keywords:

Durable goods monopoly, Coase problem, trickle-down technology, screening.

Abstract

We show that when it takes time for a durable goods monopolist to make its high-end new technology accessible to low-end market (the trickle-down technology constraint), the monopolist's high-end product might have a higher-than-optimum quality. This result differs from conventional screening models, in which the qualities of non-durable goods supplied by a monopolist never exceed the optimum, and only consumers with the highest valuation consume the efficient quality. In another literature discussing a durable goods monopolist who delays the introduction of low-end product as a marketing strategy, but not due to the trickle-down constraint, the qualities will not exceed the optimum either. Our results show that the trickle-down constraint will make the monopolist chooses a higher-than-optimum quality when the difference of the valuations of high demand and low demand consumers are in certain ranges. The intuition follows Spence (1975): the efficient quality is determined by the marginal cost and the average of all consumers' marginal valuations, while the monopolist chooses quality such that the marginal cost equals the marginal consumer's marginal valuation.

Author Biographies

Su-Chen Huang, Overseas Chinese University

Finance

Shih-Ti Yu, National Tsing Hua University

Quantitative Finance

Woody Chih-Yi Chi, National Chung Hsing University

Finance

Wen-Ben Yang, National Chung Hsing University

Finance

Downloads

Published

2015-04-16

Issue

Section

Articles