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

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  • Dennis W. Carlton
  • Michael Waldman

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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Bibliographic Info

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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  1. Hodaka Morita & Michael Waldman, 2004. "Durable Goods, Monopoly Maintenance, and Time Inconsistency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 273-302, 06.
  2. Joseph Farrell and Carl Shapiro., 1987. "Optimal Contracts with Lock-In," Economics Working Papers 8758, University of California at Berkeley.
  3. Gilbert, Richard & Katz, Michael, 2001. "An Economist's Guide to U.S. v Microsoft," Competition Policy Center, Working Paper Series qt7kj1x7g9, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  4. Barry Nalebuff, 2004. "Bundling as an Entry Barrier," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 159-187, February.
  5. Johnson, Justin P & Waldman, Michael, 2003. " Leasing, Lemons, and Buybacks," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 247-65, Summer.
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  8. Klemperer, Paul, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 375-94, May.
  9. Lee, In Ho & Lee, Jonghwa, 1998. "A Theory of Economic Obsolescence," Journal of Industrial Economics, Wiley Blackwell, vol. 46(3), pages 383-401, September.
  10. 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.
  11. 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.
  12. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  13. Joseph Farrell and Carl Shapiro., 1988. "Dynamic Competition with Switching Costs," Economics Working Papers 8865, University of California at Berkeley.
  14. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
  15. Jay Pil Choi, 2004. "Tying and innovation: A dynamic analysis of tying arrangements," Economic Journal, Royal Economic Society, vol. 114(492), pages 83-101, 01.
  16. 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.
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Cited by:
  1. Dennis W. Carlton & Joshua S. Gans & Michael Waldman, 2010. "Why Tie a Product Consumers Do Not Use?," American Economic Journal: Microeconomics, American Economic Association, vol. 2(3), pages 85-105, August.
  2. Jin-Hyuk Kim, 2008. "Digital Rights Management and Technological Tying," Working Papers 08-05, NET Institute, revised Sep 2008.
  3. Greenlee, Patrick & Reitman, David & Sibley, David S., 2008. "An antitrust analysis of bundled loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1132-1152, September.

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