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Exercising Market Power in Proprietary Aftermarkets

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  • Severin Borenstein
  • Jeffrey K. Mackie-Mason
  • Janet S. Netz

Abstract

Over 20 recent antitrust cases have turned on whether competition in complex durable-equipment markets prevents manufacturers from exercising market power over proprietary aftermarket products and services. We show that the price in the aftermarket will exceed marginal cost despite competition in the equipment market. Absent perfectly contingent long-term contracts, firms will balance the advantages of marginal-cost pricing to future generations of consumers against the payoff from monopoly pricing for current, locked-in equipment owners. The result holds for undifferentiated Bertrand competition, differentiated duopoly, and monopoly equipment markets. We also examine the effects of market growth and equipment durability. Copyright (c) 2000 Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 9 (2000)
Issue (Month): 2 (06)
Pages: 157-188

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Handle: RePEc:bla:jemstr:v:9:y:2000:i:2:p:157-188

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Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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Cited by:
  1. Glenn Ellison, 2004. "A Model of Add-on Pricing," Economics Working Papers 0049, Institute for Advanced Study, School of Social Science.
  2. Shastitko, A., 2012. "Competition on Aftermarkets: the Subject Matter and Policy Applications," Journal of the New Economic Association, New Economic Association, vol. 16(4), pages 104-126.
  3. Severin Borenstein & Jeff MacKie-Mason & Janet Netz, 1994. "Tying and Market Power," Industrial Organization 9401001, EconWPA.
  4. Miao, Chun-Hui, 2010. "Consumer myopia, standardization and aftermarket monopolization," European Economic Review, Elsevier, vol. 54(7), pages 931-946, October.
  5. Ben O. Smith, 2013. "Piracy, Awareness and Welfare in a Required Aftermarket," 2013 Papers psm164, Job Market Papers.
  6. Paul Isely & Matthew Roelofs, 2004. "Primary market and aftermarket competition in the bicycle component industry," Applied Economics, Taylor & Francis Journals, vol. 36(18), pages 2097-2102.
  7. Zhiqi Chen & Thomas Ross & W. Stanbury, 1998. "Refusals to Deal and Aftermarkets," Review of Industrial Organization, Springer, vol. 13(1), pages 131-151, April.
  8. Aidan Hollis, 1996. "Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties," Working Papers ecpap-96-03, University of Toronto, Department of Economics.
  9. Hartmann, Wesley R. & Nair, Harikesh S., 2007. "Retail Competition and the Dynamics of Consumer Demand for Tied Goods," Research Papers 1990, Stanford University, Graduate School of Business.
  10. Heubrandner, Florian & Skiera, Bernd, 2010. "Time preference and the welfare effects of tie-in sales," Economics Letters, Elsevier, vol. 108(3), pages 314-317, September.
  11. Östlin, Johan & Sundin, Erik & Björkman, Mats, 2008. "Importance of closed-loop supply chain relationships for product remanufacturing," International Journal of Production Economics, Elsevier, vol. 115(2), pages 336-348, October.
  12. Laussel, Didier & Resende, Joana, 2014. "Dynamic price competition in aftermarkets with network effects," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 106-118.
  13. Didier LAUSSEL & Ngo Van LONG & Joana RESENDE, 2014. "Network E¤ects, Aftermarkets and the Coase Conjecture : A Dynamic Markovian Approach," Cahiers de recherche 06-2014, Centre interuniversitaire de recherche en économie quantitative, CIREQ.

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