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Competition, Monopoly Maintenance, and Consumer Switching Costs

Author

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  • Morita, Hodaka
  • Waldman, Michael

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 provides an explanation for this practice that is based on consumer switching costs and the choice of consumers between maintaining and replacing used units. In our explanation, if a firm does not monopolize the maintenance market for its own product, then consumers sometimes maintain used units when it would be efficient for the units to be replaced. In turn, the return to monopolizing the maintenance market is that the practice allows the firm to avoid this inefficiency. An interesting aspect of our analysis that has significant public-policy implications is that, in contrast to most previous explanations for why a durable-goods producer with little or no market power would monopolize the maintenance market for its own product, in our explanation the practice increases rather than decreases both social welfare and consumer welfare.

Suggested Citation

  • Morita, Hodaka & Waldman, Michael, 2006. "Competition, Monopoly Maintenance, and Consumer Switching Costs," MPRA Paper 1426, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:1426
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    File URL: https://mpra.ub.uni-muenchen.de/1426/1/MPRA_paper_1426.pdf
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    References listed on IDEAS

    as
    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. 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.
    3. 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.
    4. Paul Klemperer, 1989. "Price Wars Caused by Switching Costs," Review of Economic Studies, Oxford University Press, vol. 56(3), pages 405-420.
    5. 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.
    6. Michael Waldman, 2003. "Durable Goods Theory for Real World Markets," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 131-154, Winter.
    7. Butz, David A, 1990. "Durable-Good Monopoly and Best-Price Provisions," American Economic Review, American Economic Association, vol. 80(5), pages 1062-1076, December.
    8. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
    9. 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.
    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. Richard Schmalensee, 1974. "Market Structure, Durability, and Maintenance Effort," Review of Economic Studies, Oxford University Press, vol. 41(2), pages 277-287.
    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. 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.
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    Citations

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    Cited by:

    1. Michael Waldman, 2004. "Antitrust Perspectives for Durable-Goods Markets," CESifo Working Paper Series 1306, CESifo Group Munich.
    2. Michael Waldman, 2010. "Competition, Monopoly, and Aftermarkets," Journal of Law, Economics, and Organization, Oxford University Press, vol. 26(1), pages 54-91, April.
    3. Keisuke Hattori & Amihai Glazer, 2013. "How to Commit to a Future Price," Working Papers 131402, University of California-Irvine, Department of Economics.
    4. 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

    durable goods; aftermarkets; switching costs;

    JEL classification:

    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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