Essays on dynamic inconsistency and quality uncertainty in durable good markets

This dissertation consists of two essays focusing on the theoretical analysis of markets for durable goods and, in particular, issues arising from quality uncertainty in such markets.;In the first essay entitled "Quality Uncertainty and Time Inconsistency in a Durable Good Market", I analyze the effect of quality uncertainty on monopoly pricing, market power and the time inconsistency problem in a durable good market when the seller cannot precommit to future prices. In particular, I consider a framework where quality is uncertain; both seller and buyers do not observe quality prior to purchase and product improvement occurs exogenously over time. I show that dispersion in quality (mean-preserving spread) may resolve the time inconsistency problem and restore market power and profits to the full-commitment level. Higher dispersion in quality creates greater demand for future product by increasing the incentive for repeat purchase by buyers with inferior quality realizations (particularly, those with higher marginal valuation for quality) and this, in turn, reduces the incentive of the seller to cut future prices. The availability of improved product next period also adds to the incentive for repeat purchase and, further, is associated with buyers selling better quality goods in the used good market that, in turn, competes with improved new product in the future. In response, prior to introducing an improved new product, the seller may reduce, and even eliminate, initial trading in the primary good market (though there is no asymmetric information) so as to reduce trading in the used good market.;In the second essay entitled "Signaling Quality through Prices in a Durable Good Market", I consider a durable good monopoly where the seller has private information about its product quality and buyers infer quality through dynamic prices. The model is a direct extension of the static model of signaling quality through prices by Bagwell and Riordan [American Economic Review (1991)]. There are two periods and two potential quality levels; the high-quality good is produced at higher unit cost than the low-quality good. I analyze the effect of inability to precommit to future price on the distortion required to signal quality through prices, as well as the effect of signaling through prices on time inconsistency. I show that unlike the complete information case, the inability to precommit to future price can decrease both profit and consumer surplus so that commitment devices may be welfare improving. Inability to commit to future price creates an incentive for a low-quality seller to imitate a high-quality type for one period and then reveal its true type in the next period; this tends to increase signaling distortion. On the other hand, greater variation in consumers' valuations of the high quality good implies that the high quality product is affected more by the time inconsistency problem so that inability to commit reduces the incentive of the low quality seller to imitate the high quality seller that, in turn, reduces signaling distortion. The first effect dominates when the unit costs of producing the two quality levels are far apart and the reverse holds when they are close.