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On the Pricing of Replacement Parts

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Abstract

This paper presents a model in which a good is made up of two parts, and each part asts one or two periods, with known probabilities. The analysis includes consumer decisions regarding part replacement, as well as profit maximization under monopoly and oligipoly. It is found that firms have incentives to supply all part for replacement, rather than force the consumer to replace the entire good when a single part is needed. In oligopoly, the non-collusive equilibrium when parts are not compatible acress brands involves pricing entire goods below marginal cost and individual parts above marginal cost. The paper also puts forward a testable hypothesis about the auto parts market, namely that the emergence of generic auto parts in the 1980s and 1990s may have not only driven down the prices of parts with which they competed, but also driven up the prices of other parts.

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File URL: http://www.unites.uqam.ca/eco/CREFE/cahiers/cah147.pdf
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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 147.

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Length: 22 pages
Date of creation: Mar 2002
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Handle: RePEc:cre:crefwp:147

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Keywords: replacement parts; capital replacement; aftermarkets; compatibility; antitrust.;

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  1. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-23, March.
  2. Carmen Matutes & Pierre Regibeau, 1988. ""Mix and Match": Product Compatibility without Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 221-234, Summer.
  3. Cho, Danny I. & Parlar, Mahmut, 1991. "A survey of maintenance models for multi-unit systems," European Journal of Operational Research, Elsevier, vol. 51(1), pages 1-23, March.
  4. Dekker, R. & Duyn Schouten, F.A. van der & Wildeman, R.E., 1996. "A Review of Multi-Component Maintenance Models with Economic Dependence," Econometric Institute Report EI 9605-/A, Erasmus University Rotterdam, Econometric Institute.
  5. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-81, December.
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