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Exercising Market Power in Proprietary Aftermarkets

Author

Listed:
  • Severin Borenstein
  • Jeffrey K. Mackie-Mason
  • Janet S. Netz

Abstract

Over 20 recent antitrust cases have turned on whether competition in complex durable-equipment markets prevents manufacturers from exercising market power over proprietary aftermarket products and services. We show that the price in the aftermarket will exceed marginal cost despite competition in the equipment market. Absent perfectly contingent long-term contracts, firms will balance the advantages of marginal-cost pricing to future generations of consumers against the payoff from monopoly pricing for current, locked-in equipment owners. The result holds for undifferentiated Bertrand competition, differentiated duopoly, and monopoly equipment markets. We also examine the effects of market growth and equipment durability. Copyright (c) 2000 Massachusetts Institute of Technology.

Suggested Citation

  • 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(2), pages 157-188, June.
  • Handle: RePEc:bla:jemstr:v:9:y:2000:i:2:p:157-188
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    Cited by:

    1. Laussel, Didier & Van Long, Ngo & Resende, Joana, 2015. "Network effects, aftermarkets and the Coase conjecture: A dynamic Markovian approach," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 84-96.
    2. Lam, Wing Man Wynne, 2014. "Switching Costs in Two-sided Markets," TSE Working Papers 14-517, Toulouse School of Economics (TSE).
    3. Miao, Chun-Hui, 2010. "Consumer myopia, standardization and aftermarket monopolization," European Economic Review, Elsevier, vol. 54(7), pages 931-946, October.
    4. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 585-637.
    5. repec:eee:ijrema:v:34:y:2017:i:4:p:813-828 is not listed on IDEAS
    6. Paul Isely & Matthew Roelofs, 2004. "Primary market and aftermarket competition in the bicycle component industry," Applied Economics, Taylor & Francis Journals, vol. 36(18), pages 2097-2102.
    7. Heubrandner, Florian & Skiera, Bernd, 2010. "Time preference and the welfare effects of tie-in sales," Economics Letters, Elsevier, vol. 108(3), pages 314-317, September.
    8. repec:bla:jindec:v:65:y:2017:i:1:p:136-182 is not listed on IDEAS
    9. repec:kap:revind:v:50:y:2017:i:4:d:10.1007_s11151-017-9571-2 is not listed on IDEAS
    10. Lam, W., 2015. "Switching Costs in Two-sided Markets," CORE Discussion Papers 2015024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    11. Ben O Smith, 2016. "Giving away the store: How the zero price constraint results in fewer add-on features," Economics Bulletin, AccessEcon, vol. 36(2), pages 983-992.
    12. Ben O. Smith, 2013. "Piracy, Awareness and Welfare in a Required Aftermarket," 2013 Papers psm164, Job Market Papers.
    13. 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.
    14. M. Savioli & L. Zirulia, 2015. "Add-on pricing: theory and evidence from the cruise industry," Working Papers wp1026, Dipartimento Scienze Economiche, Universita' di Bologna.
    15. Baake, Pio, 2010. "Accidents, Liability Obligations and Monopolized Markets for Spare Parts," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 1-24.
    16. Laussel, Didier & Resende, Joana, 2014. "Dynamic price competition in aftermarkets with network effects," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 106-118.
    17. Wesley R. Hartmann & Harikesh S. Nair, 2010. "Retail Competition and the Dynamics of Demand for Tied Goods," Marketing Science, INFORMS, vol. 29(2), pages 366-386, 03-04.
    18. 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.
    19. Lee, Jinhyuk & Park, Jaeok, 2014. "Pricing Of Complementary Goods As An Implicit Financial Arrangement," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 55(2), pages 207-228, December.
    20. Severin Borenstein & Jeff MacKie-Mason & Janet Netz, 1994. "Tying and Market Power," Industrial Organization 9401001, EconWPA.
    21. Baake Pio, 2010. "Accidents, Liability Obligations and Monopolized Markets for Spare Parts," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-26, May.
    22. 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.
    23. Östlin, Johan & Sundin, Erik & Björkman, Mats, 2008. "Importance of closed-loop supply chain relationships for product remanufacturing," International Journal of Production Economics, Elsevier, vol. 115(2), pages 336-348, October.
    24. Hartmann, Wesley R. & Nair, Harikesh S., 2007. "Retail Competition and the Dynamics of Consumer Demand for Tied Goods," Research Papers 1990, Stanford University, Graduate School of Business.

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