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Competition, Monopoly Maintenance, and Consumer Switching Costs

Author

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  • Hodaka Morita
  • Michael Waldman

Abstract

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)

Suggested Citation

  • Hodaka Morita & Michael Waldman, 2010. "Competition, Monopoly Maintenance, and Consumer Switching Costs," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 230-255, February.
  • Handle: RePEc:aea:aejmic:v:2:y:2010:i:1:p:230-55
    Note: 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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    References listed on IDEAS

    as
    1. 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.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    3. Richard Schmalensee, 1974. "Market Structure, Durability, and Maintenance Effort," Review of Economic Studies, Oxford University Press, vol. 41(2), pages 277-287.
    4. Paul Klemperer, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 405-420.
    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, June.
    6. Michael Waldman, 2010. "Competition, Monopoly, and Aftermarkets," Journal of Law, Economics, and Organization, Oxford University Press, vol. 26(1), pages 54-91, April.
    7. Chen, Zhiqi & Ross, Thomas W., 1999. "Refusals to deal and orders to supply in competitive markets," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 399-417, April.
    8. 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.
    9. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    10. Chen, Zhiqi & Ross, Thomas W, 1993. "Refusals to Deal, Price Discrimination, and Independent Service Organizations," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(4), pages 593-614, Winter.
    11. Elzinga, Kenneth G & Mills, David E, 2001. "Independent Service Organizations and Economic Efficiency," Economic Inquiry, Western Economic Association International, vol. 39(4), pages 549-560, October.
    12. Zhiqi Chen & Thomas Ross & W. Stanbury, 1998. "Refusals to Deal and Aftermarkets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 13(1), pages 131-151, April.
    13. Butz, David A, 1990. "Durable-Good Monopoly and Best-Price Provisions," American Economic Review, American Economic Association, vol. 80(5), pages 1062-1076, December.
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    Citations

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    Cited by:

    1. Shastitko, A., 2012. "Competition on Aftermarkets: the Subject Matter and Policy Applications," Journal of the New Economic Association, New Economic Association, vol. 16(4), pages 104-126.
    2. Keisuke Hattori & Amihai Glazer, 2013. "How to Commit to a Future Price," Working Papers 131402, University of California-Irvine, Department of Economics.
    3. Michael Waldman, 2010. "Competition, Monopoly, and Aftermarkets," Journal of Law, Economics, and Organization, Oxford University Press, vol. 26(1), pages 54-91, April.
    4. Michael Waldman, 2004. "Antitrust Perspectives for Durable-Goods Markets," CESifo Working Paper Series 1306, CESifo Group Munich.

    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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