In one of his famous papers, Durability and Monopoly, Coase conjectured that a durable goods monopolist could not exercise market power because he could not credibly commit to reduce output. Let’s say that the monopolist had a stock of the good equal to X. He sells the monopolist quantity of .5X. Once he does that, he has an incentive to sell half of the remaining half. Then he has an incentive to sell half of the half of the remaining half. And on and on. Understanding this, consumers believe that the monopolist will eventually sell all X units, and hence will pay no more than P(X)-which just happens to be the competitive price. Due to the inability to precommit, the monopolist cannot charge a monopoly price and extract a monopoly rent. (Stokey and others have proved Coase’s conjecture formally.)
The other day I was speaking to someone in the aluminum business. He related a conversation with a Russian guy who traded for Rusal-Oleg (“The Living Neanderthal”) Deripaska’s aluminum company. Since the Crisis, huge stockpiles of aluminum have built up. These stocks weigh on prices. Rusal and others are keeping these supplies off the market, but that still doesn’t support prices because consumers realize that they will eventually be released. Rusal (and others) cannot credibly commit not to sell these ingots in the future.
What a dilemma.
But the Russian Rusal trader had a solution. He said: “If only there was a way to make all this aluminum radioactive! Then all our problems would be solved!”
And he’s right: once contaminated, the metal would be unsaleable. Credibility problem solved.
Call it the Aluminum Meets Polonium Solution to the Coase Conjecture.