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Competition, Monopoly, and Aftermarkets

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  • Michael Waldman

Abstract

Consider a durable goods producer that has the option of monopolizing an aftermarket such as repair for its own product. An important question is whether such monopolization reduces welfare? We show that the answer to this question is frequently no. In particular, we explore three models that illustrate various ways in which aftermarket monopolization can reduce inefficiencies and thus increase social welfare and frequently also consumer welfare. Our article shows that efficiency enhancing aftermarket monopolization may be much more common than previous literature suggests. (JEL K21, L12, L49) The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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Bibliographic Info

Article provided by Oxford University Press in its journal The Journal of Law, Economics, & Organization.

Volume (Year): 26 (2010)
Issue (Month): 1 (April)
Pages: 54-91

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Handle: RePEc:oup:jleorg:v:26:y:2010:i:1:p:54-91

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References

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  1. Zhiqi Chen & Tom Ross, 1993. "Refusals to deal, Price Discrimination and Independent Service Organizations," Carleton Industrial Organization Research Unit (CIORU) 93-01, Carleton University, Department of Economics.
  2. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  3. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  4. Hodaka Morita & Michael Waldman, 2010. "Competition, Monopoly Maintenance, and Consumer Switching Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 230-55, February.
  5. Joseph Farrell and Carl Shapiro., 1987. "Optimal Contracts with Lock-In," Economics Working Papers 8758, University of California at Berkeley.
  6. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
  7. Schmalensee, Richard, 1974. "Market Structure, Durability, and Maintenance Effort," Review of Economic Studies, Wiley Blackwell, vol. 41(2), pages 277-87, April.
  8. Waldman, Michael, 1996. "Durable Goods Pricing When Quality Matters," The Journal of Business, University of Chicago Press, vol. 69(4), pages 489-510, October.
  9. Igal Hendel & Alessandro Lizzeri, 1999. "Interfering with Secondary Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 1-21, Spring.
  10. Mallela, Parthasaradhi & Nahata, Babu, 1980. "Theory of Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1009-25, October.
  11. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  12. Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 61-92, April.
  13. Zhiqi Chen & Thomas Ross & W. Stanbury, 1998. "Refusals to Deal and Aftermarkets," Review of Industrial Organization, Springer, vol. 13(1), pages 131-151, April.
  14. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  15. Su, Teddy T, 1975. "Durability of Consumption Goods Reconsidered," American Economic Review, American Economic Association, vol. 65(1), pages 148-57, March.
  16. Zhiqi Chen & Thomas W. Ross, 1998. "Orders to Supply as Substitutes for Commitments to Aftermarkets," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1204-1224, November.
  17. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  18. Klemperer, Paul, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 405-20, July.
  19. Rust, John, 1986. "When Is It Optimal to Kill Off the Market for Used Durable Goods?," Econometrica, Econometric Society, vol. 54(1), pages 65-86, January.
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Citations

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Cited by:
  1. Pio Baake, 2008. "Accidents, Liability Obligations and Monopolized Markets for Spare Parts: Profits and Social Welfare," Discussion Papers of DIW Berlin 782, DIW Berlin, German Institute for Economic Research.
  2. Bernard, Sophie, 2011. "Remanufacturing," Journal of Environmental Economics and Management, Elsevier, vol. 62(3), pages 337-351.
  3. Cabral, Luís M B, 2008. "Aftermarket Power and Basic Market Competition," CEPR Discussion Papers 6802, C.E.P.R. Discussion Papers.
  4. 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.
  5. Gans, Joshua S., 2012. "Mobile application pricing," Information Economics and Policy, Elsevier, vol. 24(1), pages 52-59.
  6. Morita, Hodaka & Waldman, Michael, 2006. "Competition, Monopoly Maintenance, and Consumer Switching Costs," MPRA Paper 1426, University Library of Munich, Germany.
  7. Rey, Patrick & Tirole, Jean, 2003. "A Primer on Foreclosure," IDEI Working Papers 203, Institut d'Économie Industrielle (IDEI), Toulouse, revised Nov 2005.
  8. Ben O. Smith, 2013. "Piracy, Awareness and Welfare in a Required Aftermarket," 2013 Papers psm164, Job Market Papers.
  9. Giovanni Goldoni, 2007. "La gestione dei rifiuti da apparecchiature elettriche ed elettroniche dopo la direttiva 2002/96/CE," Working Papers 43, University of Verona, Department of Economics.
  10. 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.
  11. Chen, Yongmin, 2011. "Refusal to Deal, Intellectual Property Rights, and Antitrust," MPRA Paper 31974, University Library of Munich, Germany.
  12. Durand-Viel, Laure & Villeneuve, Bertrand, 2009. "Strategic Capacity Investment under Holdup Threats: The Role of Contract Length and Width," MPRA Paper 19015, University Library of Munich, Germany.

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