Pacman Conjecture - Durable-goods Monopolists and The Coase Conjecture

Durable-goods Monopolists and The Coase Conjecture

A durable-goods monopolist sells goods which are in finite supply and which last forever, (not depreciating over time). According to the Coase Conjecture, such a monopolist has no market power as it is in competition with itself; the more of the good it sells in period one the less it will be able to sell in future periods.

Assuming marginal costs are zero. In the first period the monopolist will produce quantity (Q1) where marginal cost = marginal revenue and so extract the monopoly surplus. However, in the second period the monopolist will face a new residual demand curve (Q − Q1) and so will produce quantity where the new marginal revenue is equal to the marginal cost, which is at the competitive market price.

There is then an incentive for consumers to delay purchase of the good as they realize that its price will decrease over time. If buyers are patient enough they will not buy until the price falls and so durable goods monopolists face a horizontal demand curve at the equilibrium price and so will have no market power.