Incentive Compatible Pricing Strategies for Product Differentiation in Durable-Goods Markets

Product differentiation in durable-goods markets is often complicated by the fact that decision processes for the market participants are intrinsically dynamic. For example, consumers can employ a variety of consumption patterns with actions that vary in time, even for a single brand of goods. Transaction costs in selling used goods prompt consumers to think ahead in order to avoid adverse lock-ins, and hence have a strong influence on the endogenous formation of these patterns. Likewise, producers have to choose their production/pricing strategies so that the demands on new and used goods are balanced, and the percentages of sold and leased new goods are properly allocated. We study pricing issues in product differentiation under this kind of setting with both monopoly and duopoly market structures. In our model, products are vertically differentiated and are treated exogenously. Consumers are heterogeneous and have the incentive to segment themselves into various consumption classes. Producers can concurrently sell and lease new goods. When selling off-lease used goods producers need to incur disposal costs. Used-goods markets are assumed to be competitive. Once consumers settle on their favorite consumption patterns in a steady limit of the equilibrium aggregate market shares are essentially static, product differentiation in durable-goods market becomes almost the same as that in search-goods markets with only minor modifications. The resulting pricing game practically becomes a mechanism design problem with one agent and either one or two principals in monopoly and duopoly settings respectively. Leasing in our model turns out to be a tool to facilitate price discrimination. We further show how and when producers can utilize concurrent selling and leasing to compete more effectively.