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Exercising Market Power in Proprietary Aftermarkets

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  • Severin Borenstein
  • Jeffrey MacKie-Mason
  • Janet Netz

Abstract

In many recent antitrust cases, manufacturers of complex high- technology equipment have been accused of exercising market power in the sale of proprietary service or parts necessary to maintain the machines they produce. The manufacturer generally concedes that it has market power in selling the aftermarket service or parts, but argues that it would not exercise such power because high aftermarket prices would cause consumers to select a different brand in the competitive market for the original equipment. We study the incentive to exercise market power in aftermarkets when the original equipment market is perfectly competitive, a differentiated duopoly, or monopolized. In all cases, we show that the price in the aftermarket will exceed marginal cost. Furthermore, our analysis indicates that aftermarket prices may actually be higher when the equipment market is more competitive. Nonetheless, we suggest that in a richer model -- in which equipment sellers might want to price discriminate, create barriers to entry, or influence the pace at which users upgrade to newer models -- firms in less competitive equipment markets are likely to have a greater incentive to maintain a monopoly position in the sale of their aftermarket products.

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Paper provided by University of California at Berkeley, Haas School of Business in its series Working Papers with number _002.

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Date of creation: Mar 1996
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Handle: RePEc:wop:calbha:_002

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Cited by:
  1. Glenn Ellison, 2004. "A Model of Add-on Pricing," Economics Working Papers, Institute for Advanced Study, School of Social Science 0049, Institute for Advanced Study, School of Social Science.
  2. Heubrandner, Florian & Skiera, Bernd, 2010. "Time preference and the welfare effects of tie-in sales," Economics Letters, Elsevier, Elsevier, vol. 108(3), pages 314-317, September.
  3. Zhiqi Chen & Thomas Ross & W. Stanbury, 1998. "Refusals to Deal and Aftermarkets," Review of Industrial Organization, Springer, Springer, vol. 13(1), pages 131-151, April.
  4. Laussel, Didier & Resende, Joana, 2014. "Dynamic price competition in aftermarkets with network effects," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 106-118.
  5. Miao, Chun-Hui, 2010. "Consumer myopia, standardization and aftermarket monopolization," European Economic Review, Elsevier, Elsevier, vol. 54(7), pages 931-946, October.
  6. Östlin, Johan & Sundin, Erik & Björkman, Mats, 2008. "Importance of closed-loop supply chain relationships for product remanufacturing," International Journal of Production Economics, Elsevier, Elsevier, vol. 115(2), pages 336-348, October.
  7. Hartmann, Wesley R. & Nair, Harikesh S., 2007. "Retail Competition and the Dynamics of Consumer Demand for Tied Goods," Research Papers, Stanford University, Graduate School of Business 1990, Stanford University, Graduate School of Business.
  8. Paul Isely & Matthew Roelofs, 2004. "Primary market and aftermarket competition in the bicycle component industry," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 36(18), pages 2097-2102.
  9. Ben O. Smith, 2013. "Piracy, Awareness and Welfare in a Required Aftermarket," 2013 Papers, Job Market Papers psm164, Job Market Papers.
  10. Severin Borenstein & Jeff MacKie-Mason & Janet Netz, 1994. "Tying and Market Power," Industrial Organization, EconWPA 9401001, EconWPA.
  11. Didier LAUSSEL & Ngo Van LONG & Joana RESENDE, 2014. "Network Effects, Aftermarkets and the Coase Conjecture : A Dynamic Markovian Approach," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 06-2014, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  12. Aidan Hollis, 1996. "Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties," Working Papers ecpap-96-03, University of Toronto, Department of Economics.
  13. Shastitko, A., 2012. "Competition on Aftermarkets: the Subject Matter and Policy Applications," Journal of the New Economic Association, New Economic Association, New Economic Association, vol. 16(4), pages 104-126.

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