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Defects in Disneyland: Quality Control as a Two-Part Tariff

Author

Listed:
  • Avishay Braverman
  • J. Luis Guasch
  • Steven Salop

Abstract

This paper shows that firms endowed with monopoly power can utilize an optional service contract form of guarantee as an instrument for effecting a surplus extracting two-part tariff. The monopolist finds it optimal to produce, guarantee and replace defective units, even if a zero defect rate could be achieved at no additional production cost. It is also shown that the price per unit is greater than the "effective" marginal cost; it may even be higher than the pure monopoly price. Moreover the monopolist is unable to extract all of the consumers surplus. Thus, that optional service contract policy can provide an effective yet defensible form of price discrimination as an alternative to possible illegal tie-ins, quantity discounts and simple two-part tariffs.

Suggested Citation

  • Avishay Braverman & J. Luis Guasch & Steven Salop, 1983. "Defects in Disneyland: Quality Control as a Two-Part Tariff," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(1), pages 121-131.
    • Handle: RePEc:oup:restud:v:50:y:1983:i:1:p:121-131.
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    File URL: http://hdl.handle.net/10.2307/2296959
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    Citations

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    Cited by:

    1. Juan Pablo Herrera Saavedra & Jacobo Campo Robledo & Natalia Cantor Vargas & Jenny-Paola Lis-Gutiérrez, 2013. "Una propuesta metodológica de discriminación de segundo grado: el caso de tarifas multiclase para el registro marcario en Colombia durante el ano 2012," Estudios Económicos SIC 10746, Superintendencia de Industria y Comercio.
    2. Sara Hsu & David Kiefer, 2005. "Perfect Price Discrimination is not So Perfect," Working Paper Series, Department of Economics, University of Utah 2005_04, University of Utah, Department of Economics.
    3. 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.
    4. Tatyana Chesnokova, 2007. "Return policies, market outcomes, and consumer welfare," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(1), pages 296-316, February.
    5. Steven Matthews & John Moore, 1984. "Monopoly Provision of Product Quality and Warranties," Discussion Papers 585R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-467, March.
    7. Shiou Shieh, 1996. "Price and Money‐Back Guarantees as Signals of Product Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 361-377, September.
    8. Juan Pablo Herrera Saavedra & Natalia Cantor Vargas & Jenny Paola Lis Gutiérrez & Jacobo Alberto Campo Robledo, 2014. "Discriminación de precios de segundo grado: el caso de tarifas multi-clase para el registro marcario en Colombia," Revista Facultad de Ciencias Económicas, Universidad Militar Nueva Granada, vol. 0(1), pages 63-78, June.

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