Journal Article

Capacity Choice Counters the Coase Conjecture

R. Preston Mcafee and Thomas Wiseman

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 75, issue 1, pages 317-331
Published in print January 2008 | ISSN: 0034-6527
Published online January 2008 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00457.x
Capacity Choice Counters the Coase Conjecture

More Like This

Show all results sharing these subjects:

  • Production and Organizations
  • Market Structure and Pricing

GO

Show Summary Details

Preview

The Coase conjecture (1972) is the proposition that a durable-goods monopolist, who sells over time and can quickly reduce prices as sales are made, will price at marginal cost. We show that an arbitrarily small deviation from Coase's assumptions—a deviation that applies in almost any practical application—results in the failure of that conjecture. In particular, we examine that conjecture in a model where there is a vanishingly small cost for production (or sales) capacity, and the seller may augment capacity in every period. In the “gap case”, any positive capacity cost ensures that in the limit, as the size of the gap and the time between sales periods shrink, the monopolist obtains profits identical to those that would prevail when she could commit ex ante to a fixed capacity. Those profits are at least 29.8% of the full static monopoly optimum.

Keywords: D23; D42

Journal Article.  9175 words.  Illustrated.

Subjects: Production and Organizations ; Market Structure and Pricing

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.