Quality, upgrades and equilibrium in a dynamic monopoly market
We examine an infinite horizon model of quality growth for a durable goods monopoly. The seller may offer any bundle(s) of current and previous quality improvements (upgrades). Subgame perfect equilibrium seller payoffs range from capturing the full social surplus down to only the initial flow value of each good, as long as the value of all future quality growth exceeds the value of a single unit. Each of these payoffs is realized in a Markov perfect equilibrium that follows the socially efficient path. However, inefficient delay equilibria, with bundling, exist for innovation rates above a threshold. © 2012 Elsevier Inc.
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