Dynamic Monopoly Pricing With Multiple Varieties: Trading Up

TL;DR

This paper analyzes how trading-up opportunities influence dynamic monopoly pricing across various product varieties, showing that pricing dynamics occur only when such opportunities exist and characterizing their impact on prices and profits.

Contribution

It introduces a comprehensive framework for understanding dynamic monopoly pricing with multiple varieties, emphasizing the role of trading-up opportunities in driving pricing dynamics.

Findings

Pricing dynamics occur only with trading-up opportunities.

The paper characterizes the lower bounds for prices and profits.

Conditions for finite-time termination of pricing dynamics are identified.

Abstract

This paper studies dynamic monopoly pricing for a broad class of settings that allow for multiple durable, multiple rental, or a mix of varieties. We show that the driving force behind pricing dynamics is the existence of trading-up opportunities. If there are no trading-up opportunities in the static monopoly outcome, then pricing dynamics do not emerge in equilibrium. With trading-up opportunities, pricing dynamics arise until these opportunities are exhausted or the game ends. We characterize the lower bound for the emerging prices and profit and study the conditions under which pricing dynamics end in finite time.