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Tying, Upgrades, and Switching Costs in Durable-Goods Markets

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Author Info
Dennis W. Carlton
Michael Waldman

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Abstract

This paper investigates the role of product upgrades and consumer switching costs in the tying of complementary products. Previous analyses of tying have found that a monopolist of one product cannot increase its profits and reduce social welfare by tying and monopolizing a complementary product if the initial monopolized product is essential, where essential means that all uses of the complementary good require the initial monopolized product. We show that this is not true in durable-goods settings characterized by product upgrades, where we show tying is especially important when consumer switching costs are present. In addition to our results concerning tying our analysis also provides a new rationale for leasing in durable-goods markets. We also discuss various extensions including the role of the reversibility of tying as well as the antitrust implications of our analysis.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11407.

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Date of creation: Jun 2005
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Handle: RePEc:nbr:nberwo:11407

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Find related papers by JEL classification:
L0 - Industrial Organization - - General
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L4 - Industrial Organization - - Antitrust Issues and Policies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Johnson, Justin P & Waldman, Michael, 2003. " Leasing, Lemons, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 247-65, Summer.
  2. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 159-187, February. [Downloadable!] (restricted)
  3. Richard J. Gilbert & Michael L. Katz, 2001. "An Economist's Guide to U.S. v. Microsoft," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 25-44, Spring. [Downloadable!] (restricted)
    Other versions:
  4. Farrell, Joseph & Shapiro, Carl, 1989. "Optimal Contracts with Lock-In," American Economic Review, American Economic Association, vol. 79(1), pages 51-68, March. [Downloadable!] (restricted)
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  5. Drew Fudenberg & Jean Tirole, 1998. "Upgrades, Tradeins, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 235-258, Summer. [Downloadable!] (restricted)
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  6. Choi, Jay Pil & Stefanadis, Christodoulos, 2001. "Tying, Investment, and the Dynamic Leverage Theory," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 52-71, Spring.
  7. Adams, William James & Yellen, Janet L, 1976. "Commodity Bundling and the Burden of Monopoly," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 475-98, August. [Downloadable!] (restricted)
  8. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April. [Downloadable!] (restricted)
  9. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
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  10. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring. [Downloadable!] (restricted)
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  11. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law & Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  12. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May. [Downloadable!] (restricted)
  13. Jay Pil Choi, 1998. "Tying and Innovation: A Dynamic Analysis of Tying Arrangements," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  14. Hodaka Morita & Michael Waldman, 2004. "Durable Goods, Monopoly Maintenance, and Time Inconsistency," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 13(2), pages 273-302, 06. [Downloadable!] (restricted)
  15. Choi, Jay Pil, 1996. "Preemptive R&D, Rent Dissipation, and the "Leverage Theory."," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1153-81, November. [Downloadable!] (restricted)
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  16. Igal Hendel & Alessandro Lizzeri, 2002. "The Role of Leasing under Adverse Selection," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 113-143, February. [Downloadable!] (restricted)
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  17. Igal Hendel & Alessandro Lizzeri, 1999. "Interfering with Secondary Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 1-21, Spring. [Downloadable!] (restricted)
  18. Michael Waldman, 1996. "Planned Obsolescence and the R&D Decision," RAND Journal of Economics, The RAND Corporation, vol. 27(3), pages 583-595, Autumn. [Downloadable!] (restricted)
  19. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter. [Downloadable!] (restricted)
  20. Lee, In Ho & Lee, Jonghwa, 1998. "A Theory of Economic Obsolescence," Journal of Industrial Economics, Blackwell Publishing, vol. 46(3), pages 383-401, September. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Dennis W. Carlton & Joshua S. Gans & Michael Waldman, 2007. "Why Tie A Product Consumers Do Not Use?," NBER Working Papers 13339, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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