Prague Economic Papers 2019, 28(5):516-531 | DOI: 10.18267/j.pep.712

Spatial Monopoly with Upgrades of Durable Goods

Yong-cong Yang¹, Pu-yan Nie², Zhao-hui Wang², Zheng-xun Tan²

¹ Guangdong University of Foreign Studies, Institute of Studies for the Great Bay Area, Guangzhou, China;

² Guangdong University of Finance & Economics, Collaborative Innovation Center of Scientific Finance & industry, Guangzhou, China;

This paper establishes a two-stage Hotelling model to identify the implications of the upgrades of durable goods produced by a spatial monopoly. The major findings indicate that, due to the positive effects on profits of the upgrading of products, the monopoly has the motivation to launch upgraded versions with high quality instead of solely producing products with low quality. The monopoly, meanwhile, would not make a commitment to either the high-quality products or the low-quality ones. In addition, the price of the low-quality products decreases as upgraded ones appear on the market in a second stage, since no consumers would store the low-quality products for future consumption.

Keywords: durable goods, spatial monopoly, commitment, upgrade, game theory

JEL classification: C61, C72, D40, L10

Received: September 3, 2017; Accepted: October 5, 2018; Prepublished online: September 24, 2019; Published: November 1, 2019  Show citation