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PacmanconjectureWikipedia,thefreeencyclopedia

Pacmanconjecture
FromWikipedia,thefreeencyclopedia

ThePacmanConjectureholdsthatdurablegoodsmonopolistshavecompletemarketpowerandsocanexerciseperfectpricediscrimination,thusextractingthetotalsurplus.[1]ThisisincontrasttotheCoaseConjecture
whichholdsthatadurablegoodsmonopolisthasnomarketpower,andsopriceisequaltothecompetitivemarketprice.
InaDecember1989journalarticle[2]MarkBagnoli,StephenW.Salant,andJosephE.Swierzbinskitheorizedthatifeachconsumercouldbereliedupontobuyagoodassoonasitspricedippedbelowacertainpoint
(withdifferentconsumersvaluinggoodsdifferently,butallpursuingthesame"getitwhileyoucan"strategy),thenamonopolistcouldsetpricesveryhighinitiallyandthen"eathiswaydownthedemandcurve,"
extractingmaximumprofitinwhatBagnolietal.called"thePacmanstrategy"afterthevoraciousvideogamecharacter.Specifically,Bagnolietal.statethat"Pacmanisasequentialbestreplytogetitwhileyoucan,"a
resulttheycall"thePacmanTheorem".Theirproof,however,reliesstronglyontheassumptionthatthereisaninfinitetimehorizon.

Contents
1 DurablegoodsmonopolistsandtheCoaseConjecture
2 DurablegoodsmonopolistsandthePacmanConjecture
3 DifferencesbetweenCoaseandPacmanconjectures
3.1 Pacmanconjecture
3.2 Coaseconjecture
4 References
5 Furtherreading

DurablegoodsmonopolistsandtheCoaseConjecture
Adurablegoodsmonopolistsellsgoodswhichareinfinitesupplyandwhichlastforever,(notdepreciatingovertime).AccordingtotheCoaseConjecture,suchamonopolisthasnomarketpowerasitisincompetition
withitselfthemoreofthegooditsellsinperiodonethelessitwillbeabletosellinfutureperiods.
Assumingmarginalcostsarezero.Inthefirstperiodthemonopolistwillproducequantity(Q1)wheremarginalcost=marginalrevenueandsoextractthemonopolysurplus.However,inthesecondperiodthemonopolist
willfaceanewresidualdemandcurve(QQ1)andsowillproducequantitywherethenewmarginalrevenueisequaltothemarginalcost,whichisatthecompetitivemarketprice.
Thereisthenanincentiveforconsumerstodelaypurchaseofthegoodastheyrealizethatitspricewilldecreaseovertime.Ifbuyersarepatientenoughtheywillnotbuyuntilthepricefallsandsodurablegoods
monopolistsfaceahorizontaldemandcurveattheequilibriumpriceandsowillhavenomarketpower.

DurablegoodsmonopolistsandthePacmanConjecture
ThePacmanConjectureontheotherhandholdsthatconsumersrealizethepriceofthegoodwillonlyfallwhentheypurchasethegood,therefore,apatientmonopolistcanexercisefullmarketpowerandperfectlyprice
discriminate.
Themonopolistsetsthepriceofthedurablegoodattimetequaltothehighestreservationpriceofaconsumerwhohasn'tpurchasedpriortothatpointt.Theconsumerthenbuysthegoodassoonasitisequaltotheir
reservationprice,astheyrealizepricewillnotfallfurtherunlesstheypurchaseit.(Bagnolietal.refertobuyersexhibitingthisbehavioras"typebuyers",or"buyersfollowingthegetitwhileyoucanstrategy".)
https://en.wikipedia.org/wiki/Pacman_conjecture

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PacmanconjectureWikipedia,thefreeencyclopedia

ThePacmanConjecturerequiresthatthemonopolisttohaveperfectinformationaboutconsumerreservationpricesandaninfinitetimehorizon.Thebuyersmustnotonlyfollowthegetitwhileyoucanstrategy,butalso
mustfaithfullybelievethatthemonopolistisfollowingaperfectPacmanstrategy(asotherwisetheywouldbetemptedtomatchpatiencewiththemonopolistinhopesofgettingabetterdeallater).Themonopolistwill
exercisefullmarketpoweroverthebuyersinthatpool,butwillnotbeabletoextractsimilarsurplusesfrombuyerswhocomeinfromoutside(forexample,thechildrenoftheoriginalbuyers)withoutdeviatingfromthe
purePacmanstrategy.

DifferencesbetweenCoaseandPacmanconjectures
Pacmanconjecture
Patientmonopolist(discountfactorgreaterthanorequalto0.5),
finitesetofbuyers,
infinitetimehorizon,
monopolistshavemaximummarketpower,
monopolistsperfectlypricediscriminate.

Coaseconjecture
Patientbuyers(discountfactorgreaterthanorequalto0.5),
nonatomicbuyers,
infinitetimehorizon,
reservationpricesarecontinuous,
monopolistshavenomarketpower,
priceisequaltotheperfectlycompetitivepriceequilibrium.

References
1.CoaseversusPacman:WhoEatsWhomintheDurableGoodsMonopoly?Author(s):NilsHenrikMorchvonderFehrandKaiUweKuhnSource:TheJournalofPoliticalEconomy,Vol.103,No.4,(Aug.,1995),pp.785812Published
by:TheUniversityofChicagoPress
2.Bagnoli,M.,Salant,S.W.,&Swierzbinski,J.E."DurableGoodsMonopolywithDiscreteDemand".TheJournalofPoliticalEconomy,97.6(December1989),pp.14591478.(JSTOR(http://www.jstor.org/discover/10.2307/1833248))

Furtherreading
1.Church,J.&Ware,R:IndustrialOrganizationAStrategicApproachp141145
2.NilsHenrikMorchvonderFehr&KaiUweKuhn:CoaseversusPacman:WhoEatsWhomintheDurableGoodsMonopoly?TheJournalofPoliticalEconomy,Vol.103,No.4(Aug.,1995),pp.785812[1]
(http://www.jstor.org/stable/2138582)
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