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

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  • Aidan Hollis

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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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-03.ps
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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-03.pdf
File Function: MainText
Download Restriction: no

Bibliographic 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
Date of revision:
Handle: RePEc:tor:tecipa:ecpap-96-03

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  1. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February.
  2. 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.
  3. Salop, Steven, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 393-406, October.
  4. 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.
  5. Russell Cooper & T.W. Ross, 1984. "Product Warranties and Double Moral Hazard," Cowles Foundation Discussion Papers 716, Cowles Foundation for Research in Economics, Yale University.
  6. Emons, Winand, 1989. "On the Limitation of Warranty Duration," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 287-301, March.
  7. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 561-72, October.
  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 for Research in Economics, Yale University.
  9. Chen, Zhiqi & Ross, Thomas W., 1994. "Why are extended warranties so expensive?," Economics Letters, Elsevier, vol. 45(2), pages 253-257, June.
  10. Emons, Winand, 1988. "Warranties, moral hazard, and the lemons problem," Journal of Economic Theory, Elsevier, vol. 46(1), pages 16-33, October.
  11. 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.
  12. Padmanabhan, V, 1995. "Usage Heterogeneity and Extended Warranties," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 33-53, Spring.
  13. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-83, December.
  14. Braverman, Avishay & Guasch, J Luis & Salop, Steven, 1983. "Defects in Disneyland: Quality Control as a Two-Part Tariff," Review of Economic Studies, Wiley Blackwell, vol. 50(1), pages 121-31, January.
  15. Nancy A. Lutz & V. Padmanabhan, 1995. "Why Do We Observe Minimal Warranties?," Marketing Science, INFORMS, vol. 14(4), pages 417-441.
  16. Bryant, W Keith & Gerner, Jennifer L, 1982. "The Demand for Service Contracts," The Journal of Business, University of Chicago Press, vol. 55(3), pages 345-66, July.
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