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Pricing Of Complementary Goods As An Implicit Financial Arrangement

Author

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  • LEE, JINHYUK
  • PARK, JAEOK

Abstract

This paper studies the common pricing practice of firms selling a durable good at a low price and a complementary consumable good at a high price. In our model, consumers discount future payments while firms receive a steady-state flow of revenues from selling the durable and consumable goods. As a result, there are potential gains from deferring consumers' payments to the future. We show that when firms commit to constant prices and consumer lock-in is possible, firms choose pricing consistent with the practice in monopoly and competition. Our result provides a new efficiency argument in the aftermarket literature.

Suggested Citation

  • Lee, Jinhyuk & Park, Jaeok, 2014. "Pricing Of Complementary Goods As An Implicit Financial Arrangement," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 55(2), pages 207-228, December.
    • Handle: RePEc:hit:hitjec:v:55:y:2014:i:2:p:207-228
    DOI: 10.15057/26970
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    References listed on IDEAS

    as
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    3. Liebowitz, S J, 1983. "Tie-In Sales and Price Discrimination," Economic Inquiry, Western Economic Association International, vol. 21(3), pages 387-399, July.
    4. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    5. Zhiqi Chen & Thomas W. Ross, 1993. "Refusals to Deal, Price Discrimination, and Independent Service Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(4), pages 593-614, December.
    6. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-149, April.
    7. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    aftermarkets; complementary goods; consumer lock-in; durable goods; implicit; financial arrangements;
    All these keywords.

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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    This item is featured on the following reading lists, Wikipedia, or ReplicationWiki pages:
    1. Aftermarket (merchandise) in Wikipedia English

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