Technology commitment and strategic resource pricing

Abstract

This paper examines optimal pricing strategies by a resource seller when endogenously-determined investment by users in resource-specific technologies creates a ‘lagged’ resource demand structure. The analysis reveals that: (i) if the seller can credibly pre-commit to a resource price path at the initial date, the optimal path features ‘high’ prices at the outset, followed by ‘low’ prices over a subsequent interval and an ‘intermediate’ long-run price; (ii) a subgame-perfect equilibrium in feedback strategies features consistently ‘high’ prices and makes both seller and users worse off in the long run; but (iii) a subgame perfect equilibrium in trigger strategies can sustain the same outcome as the precommitment equilibrium.