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Two-Part Tariff and Aftermarket Duopoly: An Illustration

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  • Joseph Felder
  • Robert Scott

Abstract

The authors shed light on the original equipment manufacturer's strategic behavior in the duopoly aftermarket. The original equipment manufacturer, firm 1, captures via its foremarket price some fraction of the aftermarket consumer surplus, where that surplus is generated by consumption of its own and its competitor's aftermarket products. The other firm, firm 2, only operates in the aftermarket and does not capture any of the aftermarket consumer surplus. Assuming a Cournot or Stackelberg duopoly aftermarket with firm 1 as the quantity leader, we find the conditions under which firm 1's aftermarket price is above or below its marginal cost; the conditions under which firm 1's profit falls or increases when firm 2 adds value to its aftermarket product or lowers its marginal cost; and the conditions under which firm 1 is less profitable or more profitable in sharing the aftermarket than it would be alone.

Suggested Citation

  • Joseph Felder & Robert Scott, 2010. "Two-Part Tariff and Aftermarket Duopoly: An Illustration," The Journal of Economic Education, Taylor & Francis Journals, vol. 41(1), pages 41-53, January.
    • Handle: RePEc:taf:jeduce:v:41:y:2010:i:1:p:41-53
    DOI: 10.1080/00220480903382222
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    References listed on IDEAS

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    1. Joseph Farrell & Michael L. Katz, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 48(4), pages 413-432, December.
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    4. Walter Y. Oi, 1971. "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 85(1), pages 77-96.
    5. Nirvikar Singh & Xavier Vives, 1984. "Price and Quantity Competition in a Differentiated Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 546-554, Winter.
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