Quality, Upgrades, and Equilibrium in a Dynamic Monopoly Model. UNC Working Paper

We examine an in\u85nite horizon model of quality growth in a durable goods monopoly market. The monopolist generates new quality improvements over time and can sell any available qualities, in any desired bundles, at each point in time. Consumers are identical and for a quality improvement to have value the buyer must possess previous qualities: goods are upgrades. We show that subgame perfect equilibrium payo¤s for the seller range from capturing the full social surplus all the way down to capturing only the current ow value of each good and that each of these payo¤s is realized in a Markov perfect equilibrium that follows the socially e ¢ cient allocation path. This is true for all discount factors. We also show that ine ¢ cient equilibria exist for rates of innovation above a threshold