Journal Article

No. 2007-1 | May 11, 2007
Pricing Damaged Goods PDF Icon

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

Citation

Preston McAfee (2007). Pricing Damaged Goods. Economics: The Open-Access, Open-Assessment E-Journal, 1 (2007-1): 1—19. http://dx.doi.org/10.5018/economics-ejournal.ja.2007-1

Assessment

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Comments and Questions


Anonymous - General Comment
September 05, 2007 - 09:20

Comment on R. Preston McAfee: Pricing Damaged Goods

This paper presents a model of companies with market power offering crimped products as a means of price discrimination. The importance of this question in real life is proved by a number of well chosen real life examples. I find the ...[more]

... topic fascinating and also the model is very interesting even though I do not find the results surprising.

The main concern that I have with the paper is that I would like to learn more – not only by means of anecdotic evidence - about the distribution of the value attributed by the customers to the high-value product (and the crimped product). The examples suggest that this valuation might depend on the customers’ budget constraints, etc.