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Exercising Market Power in Proprietary Aftermarkets
Author(s) -
Borenstein Severin,
MackieMason Jeffrey K.,
Netz Janet S.
Publication year - 2000
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1430-9134.2000.00157.x
Subject(s) - duopoly , monopoly , marginal cost , market power , competition (biology) , industrial organization , economics , microeconomics , market share , business , balance (ability) , cournot competition , finance , medicine , ecology , physical medicine and rehabilitation , biology
Over 20 recent antitrust cases have turned on whether competition in complex durable‐equipment markets prevents manufacturers from exercising market power over proprietary aftermarket products and services. We show that the price in the aftermarket will exceed marginal cost despite competition in the equipment market. Absent perfectly contingent long‐term contracts, firms will balance the advantages of marginal‐cost pricing to future generations of consumers against the payoff from monopoly pricing for current, locked‐in equipment owners. The result holds for undifferentiated Bertrand competition, differentiated duopoly, and monopoly equipment markets. We also examine the effects of market growth and equipment durability.