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Tying and Market Power

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Author Info

  • Severin Borenstein

    (University of Michigan, Dept of Economics)

  • Jeff MacKie-Mason
  • Janet Netz

Abstract

Many businesses provide aftermarket services, including parts, maintenance, consulting, upgrades and modifications to durable consumer and business equipment. We investigate the effect on the original equipment manufacturer and on consumers if the manufacturer is the only (monopoly) service provider for the equipment it sells. Controlling the service market may be a profitable strategic objective, but there are several possible problems. The firm needs a durable intellectual property advantage to dominate independent service organizations. Even with such an advantage, active competition from vendors of alternate original equipment may force the manufacturer to dissipate service profits through equipment market competition to obtain market share. Further, the courts appear to be sympathetic to antitrust claims against manufacturers when they attempt to extend their proprietary control over one component of service to monopoly control overall all service provision. We also find that reputation effects may prevent manufacturers from fully exploiting their monopoly power in the aftermarket, but that reputation does not generally lead to competitive prices.

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Bibliographic Info

Paper provided by EconWPA in its series Industrial Organization with number 9401001.

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Date of creation: 18 Jan 1994
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Handle: RePEc:wpa:wuwpio:9401001

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  1. Severin Borenstein & Jeffrey K. Mackie-Mason & Janet S. Netz, 2000. "Exercising Market Power in Proprietary Aftermarkets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 157-188, 06.
  2. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
  3. Andrea Shepard, 1987. "Licensing to Enhance Demand for New Technologies," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 360-368, Autumn.
  4. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
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