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Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties

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Author Info
Aidan Hollis

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Abstract

This paper investigates whether the contractual exclusion of third-party extended warranties should be legally permissible, using a model incorporating consumer heterogeneity. The welfare effects of competition in the market for extended warranties are shown to depend on the degree of competition in the product market. In contrast to the approach typically adopted by the courts, the paper argues that manufacturers should not generally be permitted to practice requirements contracting in extended warranties, even when the product market is competitive.

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Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number ecpap-96-03.

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Length: 25 pages
Date of creation: 12 Jan 1996
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Handle: RePEc:tor:tecipa:ecpap-96-03

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Find related papers by JEL classification:
L4 - Industrial Organization - - Antitrust Issues and Policies
L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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  1. Emons,Winand, 1986. "On the limitation of warranty duration," Discussion Paper Serie A 41, University of Bonn, Germany.
    Other versions:
  2. Braverman, Avishay & Guasch, J Luis & Salop, Steven, 1983. "Defects in Disneyland: Quality Control as a Two-Part Tariff," Review of Economic Studies, Blackwell Publishing, vol. 50(1), pages 121-31, January. [Downloadable!] (restricted)
  3. Padmanabhan, V, 1995. "Usage Heterogeneity and Extended Warranties," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 4(1), pages 33-53, Spring.
  4. Severin Borenstein & Jeffrey MacKie-Mason & Janet Netz, 1996. "Exercising Market Power in Proprietary Aftermarkets," Working Papers _002, University of California at Berkeley, Haas School of Business. [Downloadable!]
    Other versions:
  5. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 561-72, October. [Downloadable!] (restricted)
  6. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  7. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February. [Downloadable!] (restricted)
  8. Nancy A. Lutz & Philip H. Dybvig, 1989. "Warranties, Durability, and Maintenance: Two Sided Moral Hazard in a Continuous-Time Model," Cowles Foundation Discussion Papers 922, Cowles Foundation, Yale University. [Downloadable!]
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  9. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law & Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
  10. Emons, Winand, 1988. "Warranties, moral hazard, and the lemons problem," Journal of Economic Theory, Elsevier, vol. 46(1), pages 16-33, October. [Downloadable!] (restricted)
  11. Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 103-113, Spring. [Downloadable!] (restricted)
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  12. Bryant, W Keith & Gerner, Jennifer L, 1982. "The Demand for Service Contracts," Journal of Business, University of Chicago Press, vol. 55(3), pages 345-66, July. [Downloadable!] (restricted)
  13. Salop, Steven, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Blackwell Publishing, vol. 44(3), pages 393-406, October. [Downloadable!] (restricted)
  14. Chen, Zhiqi & Ross, Thomas W., 1994. "Why are extended warranties so expensive?," Economics Letters, Elsevier, vol. 45(2), pages 253-257, June. [Downloadable!] (restricted)
  15. Linda A. Welling, 1989. "Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds under Asymmetric Information," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 62-78, February. [Downloadable!] (restricted)
    Other versions:
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