Praveen Kumar

"Price discrimination and product innovaiton with resale trading," International Journal of Industrial Organization Volume 20, Issue 9, November 2002, pages 1313-39.

JEL codes:
Keywords: spillovers, basic R&D, intellectual property protection

Abstract: This article considers a durable goods monopolist's dynamic price and product quality choice when buyers have diverse tastes and can trade used durables among themselves. We derive four main results. First, transactions in the resale market may occur because sequential introduction of embodied product innovation in the new durable goods market motivates high demand-intensity consumers to "trade up'' to the newly introduced higher product quality. Second, and compared to the situation where resale markets may be non-functional, active trading in used durables significantly expands the monopolist's choice of dynamic price-quality strategies that are consistent with consumer rational-expectations. Third, consumer rational-expectations constrain the monopolist's ability to intertemporally price discriminate through strategic choice of product quality, but resale trading among consumers substantially improves his price discrimination ability, especially when the time between offers is small. Fourth, if the time between offers is small, then the monopolist optimally chooses an introductory product quality that is even lower than the socially-efficient quality for the marginal consumer in the market; however, and unlike most of the available product-line pricing literature, this distorted quality is initially accepted by the infra-marginal consumers, who subsequently ``trade-up'' to their socially-efficient quality. Finally, we also derive predictions regarding the determinants of (1) the volume of resale trading, (2) the extent or size of product innovation, and (3) the price-discount for second-hand goods.