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Competition, Monopoly, and Aftermarkets

  • Michael Waldman

Consider a durable goods producer that has the option of monopolizing an aftermarket such as repair for its own product. An important question is whether such monopolization reduces welfare? We show that the answer to this question is frequently no. In particular, we explore three models that illustrate various ways in which aftermarket monopolization can reduce inefficiencies and thus increase social welfare and frequently also consumer welfare. Our article shows that efficiency enhancing aftermarket monopolization may be much more common than previous literature suggests. (JEL K21, L12, L49) The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email:, Oxford University Press.

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Article provided by Oxford University Press in its journal The Journal of Law, Economics, & Organization.

Volume (Year): 26 (2010)
Issue (Month): 1 (April)
Pages: 54-91

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Handle: RePEc:oup:jleorg:v:26:y:2010:i:1:p:54-91
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  1. Waldman, Michael, 1997. "Eliminating the Market for Secondhand Goods: An Alternative Explanation for Leasing," Journal of Law and Economics, University of Chicago Press, vol. 40(1), pages 61-92, April.
  2. Zhiqi Chen & Tom Ross, 1996. "Orders to Supply as Substitutes for Commitments to Aftermarkets," Carleton Industrial Organization Research Unit (CIORU) 96-02, Carleton University, Department of Economics.
  3. Zhiqi Chen & Tom Ross, 1993. "Refusals to deal, Price Discrimination and Independent Service Organizations," Carleton Industrial Organization Research Unit (CIORU) 93-01, Carleton University, Department of Economics.
  4. Mallela, Parthasaradhi & Nahata, Babu, 1980. "Theory of Vertical Control with Variable Proportions," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 1009-25, October.
  5. Joseph Farrell and Carl Shapiro., 1987. "Optimal Contracts with Lock-In," Economics Working Papers 8758, University of California at Berkeley.
  6. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
  7. Igal Hendel & Alessandro Lizzeri, 1999. "Interfering with Secondary Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 1-21, Spring.
  8. Richard Schmalensee, 1974. "Market Structure, Durability, and Maintenance Effort," Review of Economic Studies, Oxford University Press, vol. 41(2), pages 277-287.
  9. Waldman, Michael, 1996. "Durable Goods Pricing When Quality Matters," The Journal of Business, University of Chicago Press, vol. 69(4), pages 489-510, October.
  10. Morita, Hodaka & Waldman, Michael, 2006. "Competition, Monopoly Maintenance, and Consumer Switching Costs," MPRA Paper 1426, University Library of Munich, Germany.
  11. Farrell, Joseph & Shapiro, Carl, 1988. "Dynamic Competition with Switching Costs," Department of Economics, Working Paper Series qt1h02g9q4, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  12. Rust, John, 1986. "When Is It Optimal to Kill Off the Market for Used Durable Goods?," Econometrica, Econometric Society, vol. 54(1), pages 65-86, January.
  13. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
  14. 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.
  15. Nancy L. Stokey, 1981. "Rational Expectations and Durable Goods Pricing," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 112-128, Spring.
  16. Su, Teddy T, 1975. "Durability of Consumption Goods Reconsidered," American Economic Review, American Economic Association, vol. 65(1), pages 148-57, March.
  17. Coase, Ronald H, 1972. "Durability and Monopoly," Journal of Law and Economics, University of Chicago Press, vol. 15(1), pages 143-49, April.
  18. Bulow, Jeremy I, 1982. "Durable-Goods Monopolists," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 314-32, April.
  19. Paul Klemperer, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 405-420.
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