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Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties

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  • Aidan Hollis

Abstract

This paper investigates whether the contractual exclusion of third-party extended warranties should be legally permissible, using a model incorporating consumer heterogeneity. The welfare effects of competition in the market for extended warranties are shown to depend on the degree of competition in the product market. In contrast to the approach typically adopted by the courts, the paper argues that manufacturers should not generally be permitted to practice requirements contracting in extended warranties, even when the product market is competitive.

Suggested Citation

  • 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.
  • Handle: RePEc:tor:tecipa:ecpap-96-03
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    References listed on IDEAS

    as
    1. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February.
    2. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
    3. Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 103-113, Spring.
    4. Chen, Zhiqi & Ross, Thomas W., 1994. "Why are extended warranties so expensive?," Economics Letters, Elsevier, vol. 45(2), pages 253-257, June.
    5. 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(3), pages 157-188, June.
    6. Emons, Winand, 1989. "On the Limitation of Warranty Duration," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 287-301, March.
    7. Padmanabhan, V, 1995. "Usage Heterogeneity and Extended Warranties," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 33-53, Spring.
    8. Philip H. Dybvig & Nancy A. Lutz, 1993. "Warranties, Durability, and Maintenance: Two-sided Moral Hazard in a Continuous-Time Model," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 575-597.
    9. Linda A. Welling, 1989. "Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds under Asymmetric Information," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 62-78, February.
    10. Emons, Winand, 1988. "Warranties, moral hazard, and the lemons problem," Journal of Economic Theory, Elsevier, vol. 46(1), pages 16-33, October.
    11. Avishay Braverman & J. Luis Guasch & Steven Salop, 1983. "Defects in Disneyland: Quality Control as a Two-Part Tariff," Review of Economic Studies, Oxford University Press, vol. 50(1), pages 121-131.
    12. Steven Salop, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 393-406.
    13. Michael Spence, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 561-572.
    14. Bryant, W Keith & Gerner, Jennifer L, 1982. "The Demand for Service Contracts," The Journal of Business, University of Chicago Press, vol. 55(3), pages 345-366, July.
    15. Nancy A. Lutz & V. Padmanabhan, 1995. "Why Do We Observe Minimal Warranties?," Marketing Science, INFORMS, vol. 14(4), pages 417-441.
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    More about this item

    JEL classification:

    • L4 - Industrial Organization - - Antitrust Issues and Policies
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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