Faruk Gui on Hugo F. Sonnenschein

Abstract

During 1984–1985, Hugo Sonnenschein, Robert Wilson, and I wrote a paper entitled “Foundations of Dynamic Monopoly and the Coase Conjecture,” (Journal of Economic Theory, 1986. Henceforth “DMCC”) This paper offers a game- theoretic analysis of Ronald Coase’s idea that a monopolist provider of a durable good would be forced to sell at the competitive price. Coase’s reasoning was as follows: as soon as the consumers who are willing to pay the monopoly price make their purchases, the monopolist has an incentive to lower his price and sell to some of the remaining consumers. Immediately after the next round of sales, the monopolist would find it worthwhile to lower his price yet again. This process would continue until all buyers with reservation prices above marginal cost are served. But rational consumers would anticipate this rapid fall of prices and wait until the market price reaches its ultimate level before making any purchases. Thus, Coase’s argument asserts that the durable goods monopolist incurs competition from an unexpected source: his future self. The time between subsequent market periods (i.e., offers) determines the extent of this competition.