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Discussion Paper

No. 2007-2 | March 01, 2007
Pricing Damaged Goods

Abstract

Companies with market power occasionally engage in intentional quality reduction of a portion of their output as a means of offering two qualities of goods for the purpose of price discrimination, even absent a cost saving. This paper provides an exact characterization in terms of marginal revenues of when such a strategy is profitable, which, remarkably, does not depend on the distribution of customer valuations, but only on the value of the damaged product relative to the undamaged product. In particular, when the damaged product provides a constant proportion of the value of the full product, selling a damaged good is unprofitable. One quality reduction produces higher profits than another if the former has higher marginal revenue than the latter.

JEL Classification

D43 L15

Cite As

Preston McAfee (2007). Pricing Damaged Goods. Economics Discussion Papers, No 2007-2, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2007-2

Assessment



Comments and Questions


Joshua Gans - Some updates
March 04, 2007 - 04:15

his paper is very interesting and build on the previous JEMS paper nicely. I particularly like the examples throughout. You might, however, like to update the Office example. The recent launch of both Office 2007 and Vista provided many interesting bundles. More so than the previous release. It would be ...[more]

... worthwhile discuss them. In particular, your remarks on Outlook seem out of date.


Anonymous - Referee Report
March 22, 2007 - 13:22

See attached file.


Anonymous - Referee Report
March 29, 2007 - 15:01

See attached file.