“Perishable Durable Goods” by In-Koo CHO
University of Illinois
We examine whether the Coase conjecture (Coase (1972), Stokey (1981), Bulow (1982), Gul, Sonnenschein, and Wilson (1986)) is robust against a slight ability of commitment of the monopolist not to sell the durable goods to consumers. We quantify the commitment ability in terms of the rate at which the durable goods perish, while keeping the time between the offers small. We demonstrate that a slight commitment capability makes a substantial difference by constructing two kinds of reservation price equilibria (Gul, Sonnenschein, and Wilson (1986)) that refute the Coase conjecture. In the first equilibrium, the monopolist credibly delays to make an acceptable offer. Almost all consumers are served, but only after extremely long delay. Most of the gains from trading is discounted away, and the resulting outcome is extremely inefficient. In the second equilibrium, the monopolist's expected profit can be made close to the static monopoly profit if the goods perish very slowly. By focusing on reservation price equilibria we rigorously eliminate any source of reputational effect. By using the first kind of reservation price equilibrium as a credible threat against the seller, we can construct many other reputational equilibria (Ausubel and Deneckere (1989)) to obtain the Folk theorem. Various extensions and applications are discussed.