Durable Goods Pricing in the Presence of Volatile Demand

Lead time and demand volatility affect manufacturer production and pricing decisions. A manufacturer must make production decisions based on economic forecasts of demand. After the production is complete and economic conditions are better understood, a monopolistic manufacturer can choose to dynamically adjust prices to react to the revealed demand. Durable goods monopolists face an additional complication -- the cannibalization of sales via the second-hand market. Using a model of an infinite horizon game between a monopolistic durable goods manufacturer and heterogeneous consumers, we investigate how lead time and demand volatility affect the monopolist´s production and pricing decisions, as well as his expected profit and consumer welfare.