Durable‐Goods Monopoly, Increasing Marginal Cost and Depreciation

Abstract

This paper combines increasing marginal cost and depreciation in a continuous‐time model of a durable‐goods monopolist. In contrast to the case of increasing marginal cost but no depreciation (analysed by Kahn) and the case of depreciation with constant marginal cost (analysed by Bond and Samuelson), steady‐state output in this model is less than in the competitive case. A turnpike result shows that choice of a long enough time horizon can make the equilibrium path of output in a finite‐horizon game arbitrarily close to the path of the infinite‐horizon game.