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In a vertically differentiated durable goods duopoly, prices tend to decline over time because the high-quality manufacturer's future product may compete more directly with the other firm's present product than with its own. This removes the standard reason not to cut prices (Stokey, 1979). Price levels depend not only on the similarity of the two products, but also on how readily the low-quality manufacturer's customers abstain from purchasing in order to obtain the high-quality good at a reduced price in the future. When quality choice is endogenized, substantially less vertical differentiation arises than would occur for nondurables. |
