Tying and Market Power

Many businesses provide aftermarket services, including parts, maintenance, consulting, upgrades and modifications to durable consumer and business equipment. We investigate the effect on the original equipment manufacturer and on consumers if the manufacturer is the only (monopoly) service provider for the equipment it sells. Controlling the service market may be a profitable strategic objective, but there are several possible problems. The firm needs a durable intellectual property advantage to dominate independent service organizations. Even with such an advantage, active competition from vendors of alternate original equipment may force the manufacturer to dissipate service profits through equipment market competition to obtain market share. Further, the courts appear to be sympathetic to antitrust claims against manufacturers when they attempt to extend their proprietary control over one component of service to monopoly control overall all service provision. We also find that reputation effects may prevent manufacturers from fully exploiting their monopoly power in the aftermarket, but that reputation does not generally lead to competitive prices.