Experiments with Software Renting

The Coase Conjecture (1972) has generated a large literature on the pricing of durable goods by monopolists. The theoretical predictions span a whole range with nearly perfect competition at one end and nearly perfect price discrimination at the other. An empirical test is therefore of importance. We test the Coase conjecture in an experimental setting and report on the results. We also test the related conjecture that the possibility of renting will alleviate the commitment problem. The results from our posted-offer markets indicate that a monopolistic seller earns more revenue by renting than by selling a durable good, even when such differences in revenue are not predicted by theory. This suggests that in actual markets, the benefit to the seller from renting a durable good is not only in eliminating the Coasian commitment problem, but also in simplifying the decision problem. Renting transforms the complicated multi-period price discrimination problem faced by a monopolistic seller into the sequence of simpler identical single-period decision problems faced by a monopolistic renter. In our data, when a seller is required to set both sale and rental prices, and consumers are free to choose the price they prefer, revenue is lower than under either renting or selling alone, further corroborating the view that the more complex the decision problem, the more difficulty the monopolist has in extracting rents.