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Pricing Damaged Goods

McAfee, R. Preston (2007) Pricing Damaged Goods. Economics Discussion Papers, 2007 (2). ISSN 1867-8009.

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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.

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Additional Information:© Author(s) 2007. This work is licensed under a Creative Commons License - Attribution-NonCommercial 2.0 Germany
Issue or Number:2
Classification Code: JEL Classification: D43 L15
Record Number:CaltechAUTHORS:MCAedp07
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Official Citation:Preston McAfee (2007). Pricing Damaged Goods. economics discussion Papers, No 2007-2.
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:8607
Deposited By: Archive Administrator
Deposited On:22 Aug 2007
Last Modified:12 Dec 2019 17:07

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