Abstract
This paper uses a simple two-period model to examine the behaviour of a monopolist who produces a durable good and engages in advertising that is also somewhat durable. It is found that changes in product durability and advertising durability have opposite effects on profit-maximizing output and advertising. Policy implications for antitrust and health regulation are discussed.
Acknowledgements
The author thanks James Payne for helpful comments. Remaining errors are the author's.
Notes
1 To place an upper bound on profit-maximizing advertising, we require that the marginal advertising costs rise more sharply than the marginal benefit of advertising, i.e. h′′ > (∂2 P 1/).
2 The advertising we consider may be viewed more of a market expanding nature. Another possibility may be to have the price elasticity be directly affected by advertising.
3 The product durability is exogenous in this model. We abstract from the monopolist's sale-lease dilemma to focus on the effects of durability changes (Bulow, Citation1986). The sale-lease dilemma seems more relevant in the case of endogenous durability choice.
4 Product durability may alternatively be strategically chosen by the firm (Bulow, Citation1986).