Tying, Upgrades, and Switching Costs in Durable-Goods Markets
AbstractThis 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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Date of creation: Jun 2005
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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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-14 (All new papers)
- NEP-COM-2005-06-14 (Industrial Competition)
- NEP-MIC-2005-06-14 (Microeconomics)
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