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Title: Markets with prepayments
Author: Rossolymos, Paul
ISNI:       0000 0004 2666 303X
Awarding Body: University of Warwick
Current Institution: University of Warwick
Date of Award: 1993
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The purpose of this thesis is to examine the behaviour of consumers and producers in markets where the consumers of a product have to prepay for their purchases and then wait for a period of time before the goods are delivered to them. Chapter 2 examines the role of prepayments as a means to support efficient exchange. We develop a framework to discuss contractual arrangements between a buyer, who places an order for a product, and a seller, who makes an investment in specific assets in response to the buyer’s order. We find that contracts stipulating a non-refundable prepayment which is to be paid when the order is placed can support efficient exchange as long as the prepayment is set equal to the amount of the investment in specific assets. In chapter 3 we develop a model of a market where some customers of a firm with monopoly power must pay an advance deposit for the right to purchase a new durable good sooner than others. We will show that this behaviour can be explained by a model in which a monopolist, having already spent money on R&D but being uncertain of the profitability of his product due to cost uncertainty, charges the non-refundable prepayment in order to be able to recover the R&D cost in the case where the product turns out to be unprofitable and, therefore, is not produced. Some high-valuation customers will be prepared to bear the risk of losing the prepayment (in the case where the product is not produced) as long as they are given priority over others in the delivery of the product. Chapter 4 examines the role of prepayments as an integral part of the pricing strategy of an incumbent firm who is privately informed as to the level of cost and is concerned with deterring entry in a market of a new product. We show that there exist separating equilibria in which the low-cost incumbent’s pricing policy is successful in deterring entry. This pricing policy involves the signing (by the incumbent and the buyers) of a number of contracts one period before production starts. These contracts require consumers who have signed them to prepay for their purchases of the product before production starts and take delivery after the end of the production period. Chapter 5 extends the model of chapter 4 to allow for heterogeneous consumers and the possibility for the incumbent to choose between two patterns for serving consumers who are willing to prepay. Both serving patterns give rise to a unique separating equilibrium in which prepayments prevent entry. In addition, rationing of those consumers who are willing to prepay may emerge in equilibrium and this depends on the serving pattern that is adopted by the incumbent. In chapter 6 we show that an incumbent seller with a known unit cost can reduce the probability of entry into his market of an entrant who faces a fixed cost of entry and whose variable unit cost is unknown by signing contracts requiring buyers to pay for the product before it is delivered to them. Buyers may sign the contracts even though they know that the entrant may turn out to be more efficient than the incumbent. This behaviour is mainly due to the assumption made that each buyer’s reservation price is decreasing in the number of buyers who purchase the product.
Supervisor: Not available Sponsor: Commission of the European Communities
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HB Economic Theory