| This study analyzes a vertically differentiated market for an imperfectly durable good served by a monopolist in an infinite horizon, discrete time game. I characterize Markov perfect equilibria of this game as a function of the common discount rate, the common depreciation rate of the goods, the length of the time period between successive price changes, and the quality levels of the goods. I establish that quality differentiation may alleviate the time inconsistency problem of a durable goods monopolist. In particular, I prove that when the monopolist is not allowed to buy the goods back from previous buyers, the set of parameters supporting the monopoly outcome is larger and the set of parameters supporting the Coase Conjecture is smaller. When the monopolist, however, is allowed to buy the goods back from previous buyers, quality differentiation only affects the off-equilibrium path either by increasing the rate at which a steady state is reached or by expanding the set of steady states supporting the monopoly outcome. This study suggests that when the innate durability of a good is high, the monopolist must commit to not buying the used goods back and produce a lower quality good to maintain his market power. |
