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Aftermarket Power and Basic Market Competition

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  • Cabral, Luís M B

Abstract

I revisit the relation between aftermarket power and basic market competition. I consider an infinite period model with overlapping consumers: in each period, one consumer is born and joins one of the existing installed bases, then aftermarket payoffs are received by sellers and consumers, then finally one consumer dies. I derive the unique symmetric Markov equilibrium of this game and the resulting stationary distribution over states (each firm's installed base). I show that an increase in aftermarket power increases the extent of increasing dominance (i.e., a large firm is increasingly more likely to capture a new consumer than a small firm). This in turn leads to several implications of aftermarket power. First, the stationary distribution places greater weight on asymmetric states. Second, social welfare is greater. Third, under some conditions consumer welfare is also greater. Fourth, the value of a firm with zero installed base is lower, and so barriers to entry are higher.

Suggested Citation

  • Cabral, Luís M B, 2008. "Aftermarket Power and Basic Market Competition," CEPR Discussion Papers 6802, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6802
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    References listed on IDEAS

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    1. Michael Waldman, 2010. "Competition, Monopoly, and Aftermarkets," Journal of Law, Economics, and Organization, Oxford University Press, vol. 26(1), pages 54-91, April.
    2. Igal Hendel & Alessandro Lizzeri, 1999. "Interfering with Secondary Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(1), pages 1-21, Spring.
    3. 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.
    4. 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.
    5. Christopher Budd & Christopher Harris & John Vickers, 1993. "A Model of the Evolution of Duopoly: Does the Asymmetry between Firms Tend to Increase or Decrease?," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 543-573.
    6. Athey, Susan & Schmutzler, Armin, 2001. "Investment and Market Dominance," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 1-26, Spring.
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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.

    More about this item

    Keywords

    aftermarkets; dynamic price competition; market power;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L4 - Industrial Organization - - Antitrust Issues and Policies

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