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The Coase conjecture, developed first by
Ronald Coase Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase received a bachelor of commerce degree (1932) and a PhD from the London School of Economics, where he was a member of the faculty until 1951. ...
, is an argument in monopoly theory. The conjecture sets up a situation in which a monopolist sells a
durable good In economics, a durable good or a hard good or consumer durable is a good that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be consid ...
to a
market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...
where resale is impossible and faces
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. T ...
s who have different valuations. The conjecture proposes that a monopolist that does not know individuals' valuations will have to sell its product at a low
price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...
if the monopolist tries to separate consumers by offering different prices in different periods. This is because the monopoly is, in effect, in price
competition Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
with itself over several periods and the consumer with the highest valuation, if he is patient enough, can simply wait for the lowest price. Thus the monopolist will have to offer a competitive price in the first period which will be low. The conjecture holds only when there is an infinite time horizon, as otherwise a possible action for the monopolist would be to announce a very high price until the second to last period, and then sell at the static monopoly price in the last period. The monopolist could avoid this problem by committing to a stable linear pricing strategy or adopting other business strategies.https://ssrn.com/abstract=496175 valuations_of_Good_(economics_and_accounting).html" "title="Value_(economics).html" ;"title="rbach (2004)


Simple two-consumer model

Imagine there are consumers, called X and Y with Value (economics)">valuations of Good (economics and accounting)">good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...
with x and y respectively. The valuations are such as x. The monopoly cannot directly identify individual consumers but it knows that there are 2 different valuations of a good. The good being sold is durable so that once a consumer buys it, the consumer will still have it in all subsequent periods. This means that after the monopolist has sold to all consumers, there can be no further sales. Also assume that production is such that average cost and marginal cost are both equal to zero. The monopolist could try to charge at a \text = y in the first period and then in the second period \text =x , hence Price discrimination, price discriminating. This will not result in consumer Y buying in the first period because, by waiting, she could get price equal to x. To make consumer Y Indifference curve, indifferent between buying in the first period or the second period, the monopolist will have to charge a price of \text{price} = dx +(1-d)y where d is a discount factor between 0 and 1. This price is such as dx + (1-d)y < y. Hence by waiting, Y forces the monopolist to compete on price with its future self.


''n'' consumers

Imagine there are n consumers with valuations ranging from y to a valuation just above zero. The monopolist will want to sell to the consumer with the lowest valuation. This is because production is costless and by charging a price just above zero it still makes a
profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory intere ...
. Hence to separate the consumers, the monopoly will charge first consumer (1-d^n)y where n is the number of consumers. If the discount factor is high enough this price will be close to zero. Hence the conjecture is proved.


See also

* The Pacman conjecture *
Durapolist In industrial organization and in particular monopoly theory, a durapolist or durable good monopolist is a producer that manipulates the durable goods, durability of its product. The term was coined by antitrust scholar Barak Orbach. The concept is ...


References


Further reading

# Coase, Ronald. "Durability and Monopoly" in Journal of Law and Economics, vol. 15(1), pp. 143–49, 1972. # Orbach, Barak
"The Durapolist Puzzle: Monopoly Power in Durable-Goods Market"
in Yale Journal on Regulation, vol. 21(1), pp. 67–118, 2004. Monopoly (economics) Pricing Anti-competitive practices Conjectures