The Coase conjecture with incomplete information on the monopolist's commitment

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Abstract

A key to the Coase conjecture is the monopolist's inability to commit to a price, which leads consumers to believe that a high current price will be followed by low future prices. This paper studies the robustness of the Coase conjecture with respect to these beliefs of consumers. In particular, there is uncertainty over whether the monopolist is committed to a price (i.e. she may be a commitment type). Consequently, consumers are no longer certain that the price will change over time. I consider two kinds of commitment types. A behavioral commitment type charges an exogenously given price, while the rational commitment type optimally chooses a price. I show that the Coase conjecture is robust with regard to uncertainty over the monopolist's commitment. When the probability of behavioral types is sufficiently small, as in the original Coase conjecture, the monopolist earns the competitive profit. When the probability of behavioral types is positive, unlike in the original Coase conjecture, there is positive delay. But the delay disappears as the probability approaches zero. When the commitment type is rational, unless the probability of the commitment type is sufficiently high, both normal and committed monopolists charge the competitive price, and thus there is no delay.

Original languageEnglish (US)
Pages (from-to)17-44
Number of pages28
JournalTheoretical Economics
Volume4
Issue number1
StatePublished - Apr 20 2009
Externally publishedYes

Keywords

  • Coase conjecture
  • Rational commitment
  • Reputational bargaining

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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