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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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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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Cited by:
  1. Jin-Hyuk Kim, 2008. "Digital Rights Management and Technological Tying," Working Papers 08-05, NET Institute, revised Sep 2008.
  2. 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.
  3. 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.

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