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Quality, Upgrades and Equilibrium in a

Dynamic Monopoly Market

James J. Anton and Gary Biglaiser

Working Paper March 2011 Revised

Abstract: We examine an infinite horizon model of quality growth for a durable goods monopoly. Quality improvements may be sold in any desired bundles. Consumers are identical and for a quality improvement to have value the buyer must possess previous qualities: goods are upgrades. Subgame perfect seller payoffs range from capturing the full social surplus down to only the initial flow value of each good. For any discount factor, 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.

JEL: C72, C73, D42, L15

Keywords: Upgrades, durable goods, monopoly, market power, coordination