Damaged Durable Goods: Mitigating the Time Inconsistency Problem

Xiaojing (Joanne) MA

In this paper, we study the time inconsistency problem in the durable goods market with entry of new consumers in each period. The monopolist only wants to sell the product to high valuation consumers at the beginning. However, the accumulation of low valuation consumers makes it irresistible to hold a sale, which takes away the monopolist’s profits from high valuation consumers. He can strategically introduce a damaged good and sell it to low valuation consumers to mitigate this problem. In a two period model, he sells the damaged good in each period. In an infinite horizon model, he introduces the damaged good with some delay. The social welfare is lower with the introduction of the damaged good than otherwise.