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Competition, Monopoly Maintenance, and Consumer Switching Costs

  • Hodaka Morita
  • Michael Waldman

Significant attention has been paid to why a durable goods producer with little or no market power would monopolize the maintenance market for its own product. This paper investigates an explanation for the practice based on consumer switching costs and the decision concerning maintaining versus replacing used units. In our explanation, if the maintenance market is not monopolized, consumers sometimes maintain used units that are more efficiently replaced. In turn, monopolizing the maintenance market avoids this inefficiency. In contrast to most previous explanations for the practice, in our explanation, the practice increases both social and consumer welfare. (JEL D42, D43, D82, K21, L12, L42)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/mic.2.1.230
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File URL: http://www.aeaweb.org/aej-micro/app/2008-0004_app.pdf
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Article provided by American Economic Association in its journal American Economic Journal: Microeconomics.

Volume (Year): 2 (2010)
Issue (Month): 1 (February)
Pages: 230-55

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Handle: RePEc:aea:aejmic:v:2:y:2010:i:1:p:230-55
Note: DOI: 10.1257/mic.2.1.230
Contact details of provider: Web page: https://www.aeaweb.org/aej-micro
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  1. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
  2. Dennis W. Carlton & Patrick Greenlee & Michael Waldman, 2008. "Assessing the Anticompetitive Effects of Multiproduct Pricing," NBER Working Papers 14199, National Bureau of Economic Research, Inc.
  3. Klemperer, Paul, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 405-20, July.
  4. Elzinga, Kenneth G & Mills, David E, 2001. "Independent Service Organizations and Economic Efficiency," Economic Inquiry, Western Economic Association International, vol. 39(4), pages 549-60, October.
  5. Hodaka Morita & Michael Waldman, 2004. "Durable Goods, Monopoly Maintenance, and Time Inconsistency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 273-302, 06.
  6. Zhiqi Chen & Thomas W. Ross, 1998. "Orders to Supply as Substitutes for Commitments to Aftermarkets," Canadian Journal of Economics, Canadian Economics Association, vol. 31(5), pages 1204-1224, November.
  7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
  8. Dennis W. Carlton & Michael Waldman, 2001. "Competition, Monopoly, and Aftermarkets," NBER Working Papers 8086, National Bureau of Economic Research, Inc.
  9. Schmalensee, Richard, 1974. "Market Structure, Durability, and Maintenance Effort," Review of Economic Studies, Wiley Blackwell, vol. 41(2), pages 277-87, April.
  10. Butz, David A, 1990. "Durable-Good Monopoly and Best-Price Provisions," American Economic Review, American Economic Association, vol. 80(5), pages 1062-76, December.
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