Coase and Christmas

The Coase Conjecture says that the ability of a durable good monopolist to price above marginal cost is limited by its own greed. Assume that the monopolist charges a high price today and that all consumers with valuations above that price buy the good. Tomorrow, the only way the monopolist can sell more goods and thus increase profits is to lower the price. But rational consumers understand the monopolist’s incentives and thus delay their purchases until the price falls. No one gains from waiting to sell at a low price so the monopolist lowers price immediately. The argument is subject to a number of qualifications. If consumers are more impatient than the monopolist, for example, the monopolist may be able to maintain a high price for longer. Or the monopolist may be able to commit not to lower price in the future – Disney does this with its Disappearing Classics program.

Christmas ought to provide a good testing ground for the Coase conjecture. A durable goods monopolist knows that high-valuation consumers are likely to want to buy before Christmas. It follows that the monopolist will want to have a post-Christmas sale. Knowing this some consumers will wait to buy – who wins depends on time preference, ability to commit and so forth. By examining which goods fall the most in price from Christmas day to Boxing day and correlating with the characteristics of the goods, the consumers who buy them and the firms that sell them we ought to be able to develop some good empirics on when the Coase conjecture is most relevant. That at least is the Tabarrok conjecture.

Addendum: Vicki Smith reminds me that another method monopolist’s can use to prevent falling prices is a “best-price within 30 days guarantee” – that is, a promise to match their own price within say 30 days. Notice that this seems like a benefit to consumers but in fact it helps the firm commit to not decrease prices since any decrease would go to old customers as well as to new customers.