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

  • Aidan Hollis

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.

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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-03.ps
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File URL: http://www.economics.utoronto.ca/public/workingPapers/UT-ECIPA-ECPAP-96-03.pdf
File Function: MainText
Download Restriction: no

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number ecpap-96-03.

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Length: 25 pages
Date of creation: 12 Jan 1996
Date of revision:
Handle: RePEc:tor:tecipa:ecpap-96-03
Contact details of provider: Postal: 150 St. George Street, Toronto, Ontario
Phone: (416) 978-5283

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  1. Severin Borenstein & Jeffrey MacKie-Mason & Janet Netz, 1996. "Exercising Market Power in Proprietary Aftermarkets," Working Papers _002, University of California at Berkeley, Haas School of Business.
  2. Braverman, Avishay & Guasch, J Luis & Salop, Steven, 1983. "Defects in Disneyland: Quality Control as a Two-Part Tariff," Review of Economic Studies, Wiley Blackwell, vol. 50(1), pages 121-31, January.
  3. Emons, Winand, 1988. "Warranties, moral hazard, and the lemons problem," Journal of Economic Theory, Elsevier, vol. 46(1), pages 16-33, October.
  4. Chen, Zhiqi & Ross, Thomas W., 1994. "Why are extended warranties so expensive?," Economics Letters, Elsevier, vol. 45(2), pages 253-257, June.
  5. Nancy A. Lutz & Philip H. Dybvig, 1989. "Warranties, Durability, and Maintenance: Two Sided Moral Hazard in a Continuous-Time Model," Cowles Foundation Discussion Papers 922, Cowles Foundation for Research in Economics, Yale University.
  6. Padmanabhan, V, 1995. "Usage Heterogeneity and Extended Warranties," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 33-53, Spring.
  7. Spence, A Michael, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 561-72, October.
  8. Bryant, W Keith & Gerner, Jennifer L, 1982. "The Demand for Service Contracts," The Journal of Business, University of Chicago Press, vol. 55(3), pages 345-66, July.
  9. 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.
  10. Linda A. Welling, 1986. "Satisfaction Guaranteed or Money (Partially) Refunded: Efficient Refunds Under Asymmetric Information," Working Papers 668, Queen's University, Department of Economics.
  11. Emons, Winand, 1989. "On the Limitation of Warranty Duration," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 287-301, March.
  12. Salop, Steven, 1977. "The Noisy Monopolist: Imperfect Information, Price Dispersion and Price Discrimination," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 393-406, October.
  13. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  14. Nancy A. Lutz & V. Padmanabhan, 1995. "Why Do We Observe Minimal Warranties?," Marketing Science, INFORMS, vol. 14(4), pages 417-441.
  15. 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 461-83, December.
  16. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February.
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